PEV Exam June 2008 - Section 2.1
Nicola1106
Registered Posts: 11 New contributor 🐸
I am struggling with section 2.1 on the PEV June 08 paper.
The answer in the model answers states that the net effect is an increase in the profit of £164.29.
I have attempted to work this out but failed. It is probably something very simple, but i have not studied for sometime!
Thanks in advance
The answer in the model answers states that the net effect is an increase in the profit of £164.29.
I have attempted to work this out but failed. It is probably something very simple, but i have not studied for sometime!
Thanks in advance
0
Comments
-
Beware the examiner's answers.
Beware the examiner's answers.
Look at the question
(b) Draft a report for the Finance Director covering the following:
(i) an explanation of why the gross profit margin is different in each scenario
Your answer should refer to the following:
• sales price per unit
• materials, labour and fixed cost per unit
............................Scenario 1.. Scenario 2
Gross profit margin...... 36.00%..... 28.57%
So first thing first, the examiner's commentThe net effect is an increase in the profit per unit of £164.29
The marks are there for saying- Scenario 1 is to set the price at £1,250 per unit whereas Scenario 2 is to set the price at £1,000 per unit
- So where one price is 25% more than the other, then you would expect the gross profit margin to be higher.
- The variable costs (Materials and Labour) are no different between the two alternatives, so they have had no effect on the different gross profit %
- But fixed costs are significant, they are identical under each scenario (genuinely FIXED)
- As scenario 1 has sales of 10,000 units each year then the fixed cost per unit is £300
- Whereas Scenario 2 has sales of 14,000 units each year so the fixed costs are spread more thinly at £214.29
- So lower fixed costs per unit would increase the gross profit margin
- Overall Scenario 1 has a £250 per unit selling price but a £85.71 per unit higher cost per unit. This means the gross profit is higher in scenario 1.
Does this help?Sandy
sandy@sandyhood.com
www.sandyhood.com0 -
Look at these per unit figures: These aren't intended as an answer to the exam question, but they might help you see where the examiner's comment has come from
Scenario..........1.....................2
Price................£1,250.............£1,000
Cost per unit
Materials.............£300.............£300
Labour................£200.............£200
Fixed Overhead.'..£300.00 .........£214.29
Gross Profit.........£450..............£285.71
If you take the Scenario 2 profit away from the scenario 1 profit, see what you get.Sandy
sandy@sandyhood.com
www.sandyhood.com0 -
Many thanks for your help. It is obvious now! I think that is half my problem, i panic so much in exams and do not read the question fully and establish what they are asking for.
I only have this one to pass then i have completed the AAT!
Many thanks again
Nicola0
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