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QUESTION: (Taken from BPP study text)
TIM produces and sells two products, the MK and the KL. The organisation expects to sell 1 MK for every 2 KLs and have monthly sales revenue of $150,000. The MK has a C/S ratio of 20% whereas the KL has a C/S ratio of 40%. Budgeted monthly fixed costs are $30,000. Determine the sales revenue needed to earn a total contribution of $20,000.Average C/S ratio = 33.3333%.
Sales revenue needed = 1 / 33.3333 x $20,000 = $60,006Now, suppose the organisation has fixed costs of $100,000, and wishes to earn total contribution of $200,000. What level of revenue must now be achieved? (I do not get this part).
Solution: 1 / 38.6 x $200,000 = $518,135.
Why is the C/S ratio greater with the increase of fixed costs?
I do not have a BPP Study Text and so I cannot really help you.
I have no idea why they have changed the CS ratio – there is no reason for it to change due to fixed costs. It would only change due to changes in either the selling price, the variable costs, or the mix between the two products.
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