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I read the chapter to it’s entirety and also took the lectures provided but I am still confused with the Test your Understanding 5 of Chapter 5 part (A) from solution. Kindly explain.
The question is: H Limited manufactures and sells two products – J and K. Annual sales are expected to be in the ratio of J:1 K:3. Total annual sales are planned to be 420,000$. J has CS ratio of 40% whereas K has 50%. Annual fixed costs are estimated to be 120,000$.Find Budgeted break-even sales value?
Solution:
Product Total Contribution Sales Revenue C/S ratio
J 42,000(how?) 105,000(how) 40%
K + 157,500(how?) + 315,000(how) 50%Given that the sales are in the ratio 1:3, then for every $4 sales J must be $1 and K must be $3.
So the sales of Ju are 1/4 x $420,000 = $105,000, and the sales of K are 3/4 x $420,000 = $315,000.
The CS ratio for J is 40%, so the contribution is 40% x $105,000 = $42,000.
The CS ratio for K is 50%, so the contribution is 50% x $315,000 = $157,500
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