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Option 1
Remain in her current premises and undertake an advertisment campaign at a cost of $2,000 to increase the profile of the shop in the area.It is estimated that revenue will increase by 10% from its current level of $50000 per year.The contribution earned on revenue is 30%Option 2
Move the shop to a central location and undertake an advertisment campaign to both increase the profile and the move to the new premises.This more extensive campaign would cost $4,000 but revenue would be expected to increase by 18% from its current level.The level of contribution earned on revenue is not expected to change(b) Calculate the present value of the Incremental contribution cash flow that will arise if option 2 is compared to option 1
My answer- i first figured out the difference of the change in sales for both option 1 and option 2
50000*10%-50000*18%
I then try to find the variable cost by (contribution-sales)*At this part im not sure which im supposed to take as sales
Is it the new sales figure of 55000 in option 1 or the 50000 which is current in option 1????Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers – they have answers and explanations.
And why are you wanting the variable cost? The question asks for the incremental contribution and you know that the contribution is 30% of the sales.
Option 1 will give a contribution of 30% x $55,000 = $16,500.
Option 2 will give a contribution of 30% x (50,000 + (18% x 50,000)) = $17,700The incremental contribution is the difference between the two.
Thank you sir now the question makes so much sense to me 🙂
Sir this is a question from the revision kit
The revision kit answer was like this so I couldn’t understand it well
50000*0.08*0.3*3.170=3804
Because I didn’t understand how the 3.170 came before
It is a section B type question in the practise tests area near the end of the bookI only typed the relevant parts to my doubt if it makes more sense to why it didn’t look like a normal question
If you are still not clear then you will have to tell me which question in which book 🙂
However, I would assume that the flows are for 4 years and the cost of capital is 10%. If that is the case then 3.170 is the 4 year annuity discount factor at 10% from the tables provided.
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