Practice 2:

Pet Park International sells cat food and dog food. Its monthly fixed costs average $620,000. 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:

Item Selling Contribution Price Margin

Cat food $40 $16

Dog food $30 $9

(a)The total monthly sales revenue required to break-even is $________. (Rounded)

(b)The total monthly sales revenue required to earn an operating income of $135,000 is $________.

(c)The company's margin of safety at a monthly sales level of $2,500,000 is $________.

(d)Pet Park is trying to improve its market position with respect to dog food and would ideally like to become more competitive in this area.They have the opportunity to invest in a piece of equipment (cost: $3,000,000, useful life is 5 years with no salvage value) that would reduce variable costs of manufacturing the dog food line from $21/case to $18/case.Pet Park believes that This would increase demand of their dog food to the extent that they could expect the total revenue split to be 60% (cat food) to 40% (dog food).Should they do it?