Fredo's Fabulous Pies are considering an investment in a new outlet in Sydney and the accountants have assembled the following information: initial fixed asset investment = $770 000;straight-line depreciation to zero over the three-year life;zero salvage value;selling price = $34.99 per pack;variable costs = $23.16 per pack;fixed costs = $245 000;quantity sold = 94 500 packs;tax rate = 35 per cent.How sensitive is OCF to an increase of one pack in the quantity sold?

Question

Quizplus · Accepted Answer

The sensitivity of OCF to an increase in quantity sold is calculated by the contribution margin per pack, which is the selling price minus variable costs, adjusted for tax. Contribution margin = $34.99 - $23.16 = $11.83. After tax, it is $11.83 * (1 - 0.35) = $7.69.

Fredo's Fabulous Pies Are Considering an Investment in a New