Question

Menlo Company distributes a single product. The company's sales and expenses for last month follow: 

Required: 

1. What is the monthly break-even point in unit sales and in dollar sales?

2. 2. Without resorting to computations, what is the total contribution margin at the break-even point?

3. 3-a. How many units would have to be sold each month to attain a target profit of $29,400? 3-b. Verify your answer by preparing a contribution format income statement at the target sales level.

4. 4. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms.

5. 5. What is the company's CM ratio? If sales increase by $70,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? 

Answer 1

Ans. 1	Break even point in unit sales =   Fixed expenses / Contribution margin per unit
	$75,600 / $6
	12,600 units
	Break even point in dollar sales = Break even in units * Selling price
	12,600 * $20
	$252,000
Ans. 2	On break even point, company's contribution margin is equal to its fixed
	cost because on the break even level of sales the operating income of
	company becomes zero and operating income is the difference between
	contribution margin and fixed cost.
	Contribution margin = $75,600.
Ans. 3 a	Unit sales for target profit   =   (Fixed expense + Target profit) / Contribution margin per unit
	($75,600 + $29,400) / $6
	$105,000 / $6
	17,500 units
Ans. 3 b	MENLO COMPANY
	CVP Income Statement
		Total	Per unit
	Sales (17,500 *p)	$350,000	$20.00
	Variable expenses (17,500 * v)	-$245,000	-$14.00
	Contribution margin	$105,000	$6.00
	Fixed expenses	-$75,600
	Net operating income (Target Profit)	$29,400
	P   =   price per unit
	V = variable cost per unit
Ans. 4	Margin of safety in dollars = Actual sales in dollars - Break even sales in dollars
	$312,000 - $252,000
	$60,000
	Margin of safety percentage = Margin of safety / Sales * 100
	$60,000 / $312,000 * 100
	19.23%
Ans. 5	Contribution margin ratio = Contribution margin per unit / Selling price per unit * 100
	$6 / $20 * 100
	30%
	Increase in contribution margin =   Increases in sales * Contribution margin ratio
	$70,000 * 30%
	$21,000
	*Fixed cost does not change by the change in sales so the incremental contribution margin will be
	equal to the increase in net operating income.
	So the expected increase in net operating income would be =   $21,000.