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ACCA Applied Knowledge · Management Accounting · Analytical techniques in budgeting and forecasting

Sales revenue was $330,000 in Year 3. The general price index (Year 0 = 100) was 125 in Year 1 and 165 in Year 3. Revenue in Year 1 was $200,000. In terms of Year 1 prices, what was the real percentage change in revenue from Year 1 to Year 3?

Real revenue rose by 25%. Deflating Year 3 revenue of $330,000 to Year 1 prices using 125/165 gives $250,000, which is 25% above the Year 1 figure of $200,000. The nominal rise of 65% overstates real growth because of inflation.

  1. A25.0% increase
  2. B65.0% increase
  3. CNo changeCorrect
  4. D10.0% decrease

Explanation

Convert Year 3 revenue to Year 1 prices: 330,000 x 125/165 = $250,000. Compare with $200,000: real change = 50,000/200,000 = 25% increase. Correct is therefore 25% increase, not 'no change'.

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