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Hello Sir, I hope you’re safe and are doing good, kindly clear this small doubt that I have with the answer key of Ques 20 ( the last part of Mylo)
”The investment is more sensitive to a change in sales price of 29·6%, so Statement 1 is incorrect”
Ok so I don’t understand where I’m going wrong, even though I get the overall answer correct that the question statement is false… the thing is that I get same percentages for both sales price and sales volume sensitivity, Could you please tell me what the correct percentages would be
My working is —> (650-457.5)/650 * 100 = 29.6% for volume as well so why does the answer key say that investment is more sensitive to change in price when both the percentages are same.
If the sales price changes then only the 1,300 will change, the variable overheads will stay the same. For a profit of zero, the contribution will have to be 70, and therefore the total sales will have to be 70 + 845 = 915. Therefore the revenue will have to fall by 1,300 – 915 = 385. So a fall of 385/1,300 = 29.6%
If the sales volume changes then both the sales revenue and the variable cost (and therefore the contribution) will change.
For a profit of zero the contribution will have to be 70, and therefore the total contribution will have to fall by 455 – 70 = 385. So a fall in contribution of 385/455 = 84.6%.Oops totally missed its effect of variable cost too, you’re the smartest!!! thank youuuuuuuuuu
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