Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow: Total Per Unit Sales $ 600,000 $ 40 Variable expenses 420,000 28 Contribution margin 180,000 $ 12 Fixed expenses 151,200 Net operating income $ 28,800 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 $58,800? 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

Answer 1.

Contribution Margin Ratio = Contribution Margin / Sales
Contribution Margin Ratio = $180,000 / $600,000
Contribution Margin Ratio = 30%

Breakeven Point in unit sales = Fixed Expenses / Contribution Margin per unit
Breakeven Point in unit sales = $151,200 / $12
Breakeven Point in unit sales = 12,600

Breakeven Point in dollar sales = Fixed Expenses / Contribution Margin Ratio
Breakeven Point in dollar sales = $151,200 / 0.30
Breakeven Point in dollar sales = $504,000

Answer 2.

At breakeven point:

Total Contribution Margin = Fixed Expenses
Total Contribution Margin = $151,200

Answer 3-a.

Required Unit Sales = (Fixed Expenses + Target Income) / Contribution Margin per unit
Required Unit Sales = ($151,200 + $58,800) / $12
Required Unit Sales = 17,500

Answer 3-b.

Income Statement Total Per Unit 700,000 $ 490,000 $ 210,000 $ 2$ Sales 40.00 Variable Expenses Contribution Margin Fixed Expenses Net Operating Income 28.00 12.00 151,200 58,800

Answer 4.

Margin of Safety in dollar = Actual Sales - Breakeven Point in dollar sales
Margin of Safety in dollar = $600,000 - $504,000
Margin of Safety in dollar = $96,000

Margin of Safety in percentage = Margin of Safety in dollar / Actual Sales
Margin of Safety in percentage = $96,000 / $600,000
Margin of Safety in percentage = 16%

Answer 5.

Contribution Margin Ratio = Contribution Margin / Sales
Contribution Margin Ratio = $180,000 / $600,000
Contribution Margin Ratio = 30%

Increase in Net Operating Income = Contribution Margin Ratio * Increase in Sales
Increase in Net Operating Income = 30% * $82,000
Increase in Net Operating Income = $24,600