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Mock 4 bpp pg 393

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Mock 4 bpp pg 393

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • June 3, 2021 at 2:43 pm #622948
    Shi2004
    Participant
    • Topics: 79
    • Replies: 33
    • ☆☆

    Hello sir im unable to get the answer for this question.
    Log co has an operating gearing ratio of 33.33%. Its sales are currently $100 million and its operating profit is $20million. Operating gearing is calculated by dividing fixed cost by variable costs.
    What will its operating profit be if sales increase by 15%?
    I find the total cost 100-20 ie 80$. Pls help

    June 3, 2021 at 3:37 pm #622963
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51576
    • ☆☆☆☆☆

    Total costs are $80M.

    Given that the fixed costs are 1/3 of the variable costs, the fixed costs must be 1/4 of the total costs i.e. $20M, and the variable costs must be 3/4 of the total costs i.e. $60M. (and it checks in that 20/60 = 33.33%).

    So the contribution is 100 – 60 = $40. So if sales increase by 15% then the contribution will increase by 15% also.

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