Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow:

	Total			Per Unit
Sales	$	632,000		$	40
Variable expenses		442,400			28
Contribution margin		189,600		$	12
Fixed expenses		151,200
Net operating income	$	38,400

Required: 1. What is the monthly break-even point in unit sales and in dollar sales? [ Break-even point in unit sales Break-even point in sales dollars 12,600 units 504,000 $ 2. Without resorting to computations, what is the total contribution margin at the break even point? Total contribution margin $ 151,200 3-a. How many units would have to be sold each month to earn a target profit of $64,800? Use the formula method. Units sold 18.000

Answer 1

Answer) S.no 3-B) S.no Particulars 1 Selling Price 2 Less: Variable cost 3 Contribution 4 Less: Fixed Expenses 5 Net Operating income Per unit in total no.of units 40 632000 15800 (=632000/40) 28 442400 12 189600 151200 38400 Particulars 1 Selling Price 2 Less: Variable cost 3 Contribution 4 Less: Fixed Expenses 5 Net Operating income units Per unit in total 18000 40 720000 18000 28 504000 18000 12 216000 151200 64800 1) There for target profit arrived Break even sales = Fixed cost / contribution per unit 151200/12 - 12600 units = 12600*40 per unit = $ 5,04,000 2) Contribution margin at Break even point = fixed expenses 151200 108000 4) After tax profit = 64800 tax rate = 40% before tax profit would be =64800/(1-0.4)= No of units to be sold = (151200+108000)/12 21600 units 21600*40= $8,64,000 3) Target profit =64800/- no of units to be sold =( Fixed expenses+ Target profit/Contribution per unit (151200+64800/12 18000 units 18000*40 = $ 7,20,000 5) Margin of safety = total units - Break even sales /total sales ((15800-12600)/15800)*100 20.25 % In dollar $ 1,28,000

6) Contribution margin ratio = contribution / sales *100 (12/40)*100 30 % Net income increase when sales increse to 56000/- sales = 632000+56000 688000 Contribution=688000*30% = 206400 Less: Fixed cost 151200 Operating income 55200 Net operating income increses by (55200-38400) i.e 16800/-