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Good evening! I’m trying to settle Q51 Arwin from Kaplan Exam Kit for year 2015.
In the scenario, Sales revenue equal to 50,000. Cost of sales = 30,000
Sales revenue is expected to increase by 12% for the first year. And it is said that variable cost of sales makes up 85% of cost of sales.
So, new revenue will be 56,000 (50,000*1,12).
As for the VC it is said in the answer (85%* sales) = 28,560.
Still, I can not understand, how did they get 28,560?
Because, it this scenario means, that 85% of new level of sales we could not get 28,560.
What I did, first I tried to calculate prior level of contribution: if COS = 30,000, then we get fixed cost 15% = 4,500. And VC = 30,000 – 4,500=25,500
So, contribution will be 50,000 – 25,500 = 24,500
Fixed costs won’t change, and remain 4,500.
So, I can calculate, that previously, VC represented 51% from Sales (25,500/50,000) and I may suppose, that the same proportion will be for the new year.
51%*56,000 = 28,560. This is the only logic I see.
My question is, when it was written in the answer 85%* sales = 28,560 – what did they meant?
Thank you in advance!You are misreading the question.
The variable cost is 85% of the cost of sales – not 85% of the sales.
The cost of sales at the moment is 30,000, so the variable cost at the moment is 85% x 30,000 = 25,500
If the sales increase by 12%, then you would expect the variable costs to increase as well by 12%. So 25,500 x 1.12 = 28,650
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