Question

Menlo Company distributes a single product. The company's sales and expenses for last month follow: Salles Variable expenses $ 604,000 1422 BDO Contribution margin Fixed expenses 1815200 150,000 Net operating income $ 31, 200

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 earn a target profit of $70,800? Use the formula method.

3-b. Verify your answer by preparing a contribution format income statement at the target sales level.

4. Refer to part 3 and now assume that the tax rate is 40%. How many units would need to be sold each month to an after-tax target profit of $70,800?  (Round the final answer to the nearest whole number.)

5. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. (Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).)

6. What is the company’s CM ratio? If monthly sales increase by $61,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

40 28 150000 Selling Price Per unit Varaibel Expense Per unit Fixed Expenses Compute the CM ratio Selling Price Per unit Varaibel Expense Per unit Contribution Margin per unit ( Selling Price - Varible Cost) CM Ratio (CM/Selling Price) 1. Compute the Break Even pont 1 Break Even in Unit Sales =( Fixed Cost / CM Per unit)=(150000/12) 2.Brake Even in Dollar sales =( Fixed Cost/ CM ratio)=(150000/0.30) 30% 12500 Units 500000 Dollars 2. Determine the Contribution Margin at the Break even point Contribution Margin at the Break even point = Fixed Cost 150000 3. a) Units to get the target profit of $70,800 |(Fixed cost + target profit)/ CM per unit =((150000+70800/12 18400

3.B) Verify the answer with Contribution margin Income Statement Contribution Margin Statement sale Varaible Expenses Contibution margin Fixed Expenses Net Operating Income Total Per unit 736000 40 515200 28 220800 150000 70800 4. Units to get the After Tax Profot of $70,800 ((Fixed cost +( target profit)/(1-Tax))/ CM per unit 22333.33 Units 4. Compute the Margin of Safety Margin of Safety in dollars =(units *selling price - BEP Dollars)=(604000-500000) Margin of Safety in Percentage =(Margin of safety Dollars / Actual sales) 104000 Dollars 17.22% Percent CM Ratio =( CM/Selling Price) Net Operating Income Increased by (0.30*61000) 30% 18300