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Hello Tutor, It is one of the dec 2016 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)
–––––
Contribution 455
Incremental fixed costs (70)
–––––
Profit 385
–––––
Which 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)
I would like to ask how to calculate the sensitivity of change in sales volume correctly? Is it takes profit $385 to divide 650 units?(385÷650) Or is takes 385 divided to 455?(385÷455)
I Hope Tutor can help me in this calculation. Thank you so much 🙂
The sensitivity is the % change needed to arrive at breakeven (i.e. zero profit).
Changes in sales volume will change the total contribution.
The contribution is currently 455 and for breakeven it would have to fall by 385 (455 – 70).
Therefore the sensitivity is 385/455 = 84.6%
(dividing %’s by units would not make sense 🙂 You either divide $’s by $’s, or divide units by units.)