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Mylo is now considering investing in a speciality coffee machine. He has estimated the following daily results for the new machine:
Sales (650 units) $1300
Variable costs ($845)
Contribution $455
Incremental fixed costs ($70)
Profit $385Which of the following statements are true regarding the sensitivity of this investment?
(1) The investment is more sensitive to a change in sales volume than sales price.
(2) If variable costs increase by 44% the investment will make a loss.
(3) The investment’s sensitivity to incremental fixed costs is 550%.
(4) The margin of safety is 84.6%
A (1), (2) and (3)
B (2) and (4)
C (1), (3) and (4)
D (3) and (4)
Answer is D.
Can you tell me which way of calculating sensitivity of sales volume is correct?
(I) 385/455 x 100= 84.6%
(II) 385/650 x 100= 59.2%I have studied the first way in FM. Can you tell which is correct of them.
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