Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow: Total Per Unit Sales $ 320,000 $ 20 Variable expenses 224,000 14 Contribution margin 96,000 $ 6 Fixed expenses 75,000 Net operating income $ 21,000 Required: 1. What is the monthly break-even point in unit sales and in dollar sales? 2. Without resorting to computations, what is the total contribution margin at the break-even point? 3-a. How many units would have to be sold each month to attain a target profit of $27,000? 3-b. Verify your answer by preparing a contribution format income statement at the target sales level. 4. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. 5. What is the company’s CM ratio? If sales increase by $82,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Statement of Profit

Particulars	Amount in $	Per Unit in $
SALES (16000 Units)	320000	20
LESS:- VARIABLE COST	224000	14
CONTRIBUTION TOTAL	96000	6
LESS:- FIXED COST	75000	N.A.
OPERATING INCOME	21000	1.3125

Answer to the question no. 1

Break Even Point (in Units) =

fixedcost contribution perunit

=

75000

= 12500 Units

Break Even Point (in Amount)=

Break Even Point in units X Sales Per Unit

= 12500 Units X $20

= $250000

Answer to the question 2.

Contribution margin at break even point is equal to Fixed Cost Amount i.e. $75000 in this case.

Answer to the question 3-a.

For achieve a target profit of $27000,

Units to be sold =

FixedCost+Desired Profit Contribution. PerUnit

=

75000+27000

= 17000 units to be sold to achieve the profit of $27000

Answer to the question 3-b.

Income Statement

Particulars	Amount in $	Per Unit in $
SALES (17000 Units)	340000	20
LESS:- VARIABLE COST	238000	14
CONTRIBUTION TOTAL	102000	6
LESS:- FIXED COST	75000	N.A.
OPERATING INCOME	27000	1.5882

Answer to the question 4.

Margin of Safety Sales (in Units) =

Total Sales (units) - Break Even Sales (units)

=16000-12500

=3500 Units

Margin of Safety Sales (in Amount) =

Margin of Safety Sales (in units) X Sales Price Per Unit

=3500 Units X $20

=$70000