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Hi all
I am looking at Q5 CTC (APM 6/08) in BPP exam kit. I dont know anything about this part b (ii). It asks for Minimum target contribution to sales ratio. I dont remember seeing this anywhere before and certainly searched the net and nothing of the sort comes up. Am I going mad???
The answer at the back completely made me panic as I dont understand this formula at all.
Can anyone shed any light on this type of question and how we approach it?
Thanks
Begum
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Contribution to sales ratio (CSR) should be learnt at the CVP or break-even analysis. It is used in the calculation of break-even point in sales dollars (BEP$), i.e. BEP$ = Fixed costs/CSR.
The question at b(ii) merely extends the break-even analysis to a capital budgeting scenario through discounting to PV.
I have done CSR many times. What I havent seen the type of formula for the answer. Have you seen this before? Maybe I need to analyse it number at a time and see if I can make sense of it. It seems like you understand whats going on.
Thanks
begum- Topics: 0
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This type of ‘what-if analysis’ (or called sensitivity analysis) question is common. The question just put a capital project analysis in a life cycle budgeting scenario.
In any capital project, the pivotal point is zero NPV. The Nellie project should be abandoned because it generates a negative NPV of 426,932. To make this project to be financially viable again, one of the methods is to raise the contribution to cover the 426,932 shortfall. The equation is constructed in this direction.
4, 9, and 5 are the original contribution so that 4X, 9X, and 5X are the contribution of respective years to cover the 426,932 shortfall. Since they are in different years and the shortfall is in present value, we have to discount them respectively by 0.893, 0.797, and 0.712.
Thanks very much. I actually understand what you are saying in your last para.
Many thanks indeed
Begum
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