Presented below are selected income statement data for Kettridge\'s Farm for the

Question

Presented below are selected income statement data for Kettridge's Farm for the month of April: Sales $110,000 COGS $ 57,000 Operating Expenses $38,000 Based on an analysis of cost behavior patterns, it has been determined that the company's contribution margin ratio is 40%. (a.) Use the income statement data to prepare a contribution margin. (b.) If sales increase by 10 percent, what will be the firm's operating income? (c.) Calculate the amount of revenue required for Kettridge's Farm to break even.

Explanation / Answer

(a.) Use the income statement data to prepare a contribution margin. Sales = $1,10,000 Variable cost = $ 66,000 ------------------------------------------ Contirbution = $44,000 (Given contribution margin = 40% of sales) Fixed cost = $29,000 ------------------------------------------- Profit = $15,000 Working ------------ Total cost = (57000 + 38000) = $95000 Fixed costs = $95000 - $66000 = $29000 (b.) If sales increase by 10 percent, what will be the firm's operating income Sales = $1,10,000 x 110% = $121000 Contribution = $121000 x 40% = $48400 Profit = $48,400 - $29,000 = $19,400 (c.) Calculate the amount of revenue required for Kettridge's Farm to break even at break even ,Fixed cost is equal to contribution and given contribution ratio = 40% of sales Break even sales = $29000 x 100/40 = $72500 amount of revenue required for Kettridge's Farm to break even = $72,500

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