Question

Best Farm sells cat food and dog food. Its monthly fixed costs average $400,000. Cat food sales represent 80% of the company's total revenue. Dog food sales constitute the remaining 20%. The company has provided the following information expressed on a per-case basis:

Sales	Conribution Conribution	Sales	Margin
Price	Margin        Margin %	Share %	Mix

Cat Food	50	15
Dog Food	30	6

Calculate: (show your calculations and round to 2 decimal places)

1. What is the Average Contribution Margin Ratio?
2. What is the total monthly Sales Revenue in Dollars required to break-even?
3. What is is the total monthly Sales Revenue required to earn an Operating Income of $135,000?
4. What is the company´s Margin of Safety at a monthly Sales level of $2,500,000?
5. If monthly fixed costs increase by $10,000, the break-even point, expressed in sales dollars, will increase to how many dollars?
6. How does break-even sales in (E) with increased fixed costs change if the product mix changes to 50% / 50%. The new break-even point in $ is?

Answer 1

A.	Calcualtion of avarage Contribution margin ratio
		Cat Food	Dog Food
	Contribution Margin(a)	15	6
	Sales(b)	50	30
	Contribution Margin ratio (a/b)	30%	20%
	Sales Mix	80%	20%
	Average Contribution Margin ratio = .30X80% + .20X20%
		28%
B.	Total Monthly sales required(in $) for break even
	Break-Even Sales (In $)= Fixed Cost / Contribution margin ratio
	Break-Even Sales (In $)= 4,00,000 / 28%
	14,28,571
C.	Total monthly Sales Revenue required to earn an Operating Income of $135,000
	Operating income required	1,35,000
	Add:- Fixed cost	4,00,000
	Contribution to be required(a)	5,35,000
	Average contribution margin ratio (b)	28%
	Monthly Sales revenue = (a/b)	19,10,714
D.	company´s Margin of Safety at a monthly Sales level of $2,500,000
	Margin of Safety = Total Sales Revenue - Break even sales revenue
	Margin of Safety = 25,00,000 -14,28,571
	10,71,429
E.	If monthly fixed costs increase by $10,000, the break-even point, expressed in sales dollars, will increase to how many dollars
	Increased Fixed Cost(a)	4,10,000
	Contribution Margin Ratio(b)	28%
	Break even Sales(In $) (a/b)	14,64,286
F.	If the product mix changes to 50% / 50%. The new break-even point in $ is
	Increased Fixed Cost(a)	4,10,000
	Revised Average Contribution Margin ratio (b) = .30X50% + .20X50%
		25%
	New Break even Sales(In $) (a/b)	16,40,000