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- February 5, 2021 at 9:31 pm #609346AnonymousInactive
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Hi, could anyone help me understand the below?
A company provides three different levels of customer service support for one of its software products. The following data relate to these three levels of support:
Support level Superior Standard Basic
Annual fee 1,000 750 400
Annual variable costs 450 250 180
Annual fixed costs
(see note below) 200 100 50
Profit 350 400 170Note: The total annual fixed costs are budgeted to be $1,000,000. None of these costs are specific to any type of customer service support.
Assume that the number of customer service support contracts sold are in the proportion:
Superior 20% Standard 30% Basic 50%The annual revenue that needs to be generated in order to break even is closest to?
The answer provided is $1,690,000.
Product Sales mix Contribution per contract Weighted average contribution
$ $
Superior 20% 550 110
Standard 30% 500 150
Basic 50% 220 110
370Breakeven point in units = $1,000,000 / $370 = 2,703 contracts
If these are sold in the proportion 20%:30%:50% then this gives sales of
Superior = 2,703 × 20% = 540.6
Standard = 2,703 × 30% = 810.9
Basic = 2,703 × 50% = 1,351.5Multiplied by the sales revenue per contract gives total revenue of
(540.6 × $1,000) + (810.9 × $750) + (1,351.5 × $400) = $1,689,375My only question is, because it is asking for revenue required, why would the answer not use sales mix % * WA C/S Ratio?
I have a very similar question on the same exam and to get the answer you;
Get the sales mix of each
Work out the individual c/s ratio (EX Superior 550/1000)
Do the same for all three, add them together and then divide this by the total FC to get the revenue?I just want to be sure I know the difference of when to use one and the other please.
Thanks in advance.
February 6, 2021 at 8:38 pm #609479AnonymousInactive- Topics: 1
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February 12, 2021 at 11:52 pm #610185Hi Abbie,
Yes great question & a common well known problem with breakeven /CVP multiproduct calcsYou can indeed do this in the method that you mentioned at the end (see above)… you will notice that this brings a different answer ( quite a ‘few’ thousand different!))
Both methods are acceptable & when CIMA Objective test writers create questions in topics like this – they allow for all different methods to be used…So… they will give you a multiple choice & you pick the nearest answer ( even if its not that near.. both methods would have been pre-calculated by question writer to ensure that either method gets full marks)… or alternatively they will design the question so that either method gives similar answers ( eg – nice round numbers) …
Anyway = in summary – dont worry, your alternative method is entirely appropriate & CIMA/ question writers are pre-empting the rounding type problem so that you cant be penalised in the exam for this
Thanks
CathFebruary 13, 2021 at 4:23 pm #610269AnonymousInactive- Topics: 1
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Hi Cath,
Great thank you for confirming 🙂 Thanks for the reassurance.
Thanks
March 4, 2021 at 7:58 pm #613386No problem… good luck with the P1 exam
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