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Sir this is a past Acca exam question:
Mylo is now considering investing in a specialty coffee machine. He has estimated
the following daily results for the new machine:
Sales (650 units) 1,300
Variable costs (845)
Incremental fixed costs (70)
Which of the following statements are true regarding the sensitivity of this
(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)
Sir here when the statement says that investment’s sensitivity to incremental fixed costs is 550%., so basically the examiner has divided 385 by 70 and has obtained 550% and hence proved that this statement is correct
Similarly in statement 1 examiner has divided 385 by 1300 and had obtained 29.6%
likewise , if we divide 385 by 650 units so we will get 59%, so isn’t this proving that investment is more sensitive to change in sales volume than sales price?
No – it proves the reverse.
Sensitivity of 59% means that sales volume would need to change by 59% for the profit to fall to zero. Sales price would only need to change by 29.6% for the profit to fall to zero – therefore sales price is more sensitive to change than is sales volume.
Sir the sensitivity here is not 59%. The breakeven sales volume here is 100. so sensitivity shoud be (650-100)/650
You are right.
However I answered this post three years ago and almost certainly did not even check the figures because human was not asking me to. He/she was asking why a bigger figure for the sensitivity meant that it was more sensitive which is not the case and I explained why.
Presumably you have the answer in your Revision Kit to check to anyway 🙂