Question

The Tigers Company sells two products with the following data:

Product A Sales ...............................................$100,000	Product B $100,000	Total $200,000
Variable costs.................................... 70,000	55,000	125,000
Contribution margin.........................$ 30,000	$ 45,000	$ 75,000

Contribution margin ratio                       30%                     45%                     37.5%

The company’s fixed expenses total $45,000 per month.

2. Based on the current sales mix, the breakeven point for the company as a whole is

A.         $200,000

B.     $175,000

C.     $120,000

D.     $150,000

2. Based on the current sales mix, if total sales increase by $30,000 per month, by how much will the overall company’s operating income increase?

A.     $11,250

B.     $60,000

C.     $12,500

D.     $90,000

Answer 1

• All working forms part of the answer
• Amounts are in $
• Answer to: Break Even point for the company as a whole=Fixed expense/Contribution margin as a whole.

Fixed Expenses	$45000
Total contribution margin ratio	37.50%
Total Break Even Sales Mix [45000/37.5%]	$120000

Hence, the correct answer is OPTION – C: $120,000

• Answer to: Increase in company’s operating income if sales increase by $30000.

Since Sale Mix is of 50%-50%, product A’s and B’s Sale will increase by $15000 each.

Current Situation (Net Operating income)

	Product A ($)	Product B ($)	Total ($)
Sales	100000	100000	200000
(-) Variable cost	70000	55000	125000
Contribution margin	30000	45000	75000
(-) Fixed Cost			45000
Net operating income			30000

If Sales increased by $30000

	Product A ($)	Product B ($)	Total ($)
Sales	115000	115000	230000
(-) Variable cost	80500 [Sales x 70%]	63250 [Sales x 55%]	143750
Contribution margin	34500 [Sales x 30%]	51750 [Sales x 45%]	86250
(-) Fixed Cost			45000
Net operating income			41250
Current operating income			30000
Increase in net operating income			$11250

Hence, the correct answer is OPTION – A: $11,250