Question

Menlo Company distributes a single product. The company's sales and expenses for last month follow: Total $ 616,000 431,200 Sales Variable expenses Contribution margin Fixed expenses Net operating income Per Unit $ 40 28 $ 12 184,800 147,600 $ 37,200 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 $60,000? 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 $61,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Break-Even Point in unit sales = Break-Even Point in unit sales = Fixed Costs Contribution Margin $ 1,47,600 $ 12300 12 Break-Even Point in unit sales = Break-Even Point in dollar sales = 12,300 units * $40 Break-Even Point in dollar sales = $ 4,92,000 2. at break-even point total contribution margin is $147,600

3-a To earn Profit $60,000 = To earn Profit $60,000 = Fixed Cost + Profit Contribution Per Unit $147,600 + $60,000 $ $ 2,07,600 12 17300 units 12 To earn Profit $60,000 = To earn Profit $60,000 =

3b If Sales are 17,300 units (17,300 * $40) (17,300 * $28) Sales Variable Expenses Contribution Margin Fixed Expenses Net Operating Income Total $ 6,92,000 $ 4,84,400 $ 2,07,600 $ 1,47,600 $ 60,000 Per Unit Percentage 40 100% 28 70% 12 30% Margin of Safety = Actual Sales - Break-Even Sales - Margin of Safety = $616,000 - $492,000 Margin of Safety = $124,000 - Margin of Safety in Percentage = *100 Margin of Safety in Percentage = (Current Sales Level- Breakeven Sales) Current Sales Level ($616,000 - $492,000) *100 $616,000 20.13% Margin of Safety in Percentage = Percentage =

CM Ratio = Contribution Margin/Selling Price *100 CM Ratio = $12/$40 *100 CM Ratio = 30% If sales increase by $61,000 per month net operating income will increase by $18,300 ($61,000 * 30%)