Question

Exercise 5-18 Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio (LO5-1, LO5-3, LO5-5, LO5-6, LO5-7) Menlo Company distributes a single product. The company's sales and expenses for last month follow: Total Sales Variable expenses Contribution margin Fixed expenses Net operating income $ 450,000 180,000 270,000 216,000 $ 54,000 Per Unit $ 30 12 $ 18 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 $90,000? 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 $50,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? Complete this question by entering your answers in the tabs below.

Answer 1

1) Break even unit = Fixed cost/Contribution margin per unit = 216000/18 = 12000 Units

Break even sales = 12000*30 = $360000

2) Contribution margin = 216000

3a) Required unit sales = (216000+90000)/18 = 17000 Units

3b) Contribution margin income statement

	Total	Per unit
Sales	510000	30
Variable cost	204000	12
Contribution margin	306000	18
Fixed cost	216000
Net income	90000

4) Calculate following

	Dollar	Percentage
Margin of safety	450000-360000 = 90000	90000/450000 = 20%

5) CM ratio = 18/30 = 60%

Net operating income increase by = 50000*60% = 30000