Question

Menlo Company distributes a single product. The company's sales and expenses for last month follow: Per Unit S20 Sales Variable expenses Contribution margin Fixed expenses Net operating income Total $ 300,000 215,600 92,400 72,600 $ 19,800 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 $35.400? 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 $56,000 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 Point in Unit Sales	12100 units
Break Even Point in Dollar Sales	$242000

Break Even Point in Unit Sales = Fixed cost/Contribution pu

= $72600/$6 = 12100 units

Break Even Point in Dollar sales = 12100 units * $20 = $242000

(2) Total contribution margin at BEP = Fixed cost

= $72600

(3A) Target profit = $35400

(Contribution pu * Units sold) - Fixed cost = $35400

($6 * Units sold) - $72600 = $35400

Units sold = 18000 units

(3B) Contribution income Statement :-

	Total	Per Unit
Sales	$360000	$20
Variable Expenses	$252000	$14
Contribution margin	$108000	$6
Fixed Expenses	$72600
Net operating income	$35400

(4)

	Dollars	Percentage
Margin of Safety	$66000	21.43%

Margin of safety in Dollars = Sales - BEP in $

= $308000 - $242000 = $66000

Margin of safety in Percentage = ($66000/$308000) * 100 = 21.43%

(5)

CM ratio	30%
Net operating income increase by	$16800

CM ratio = Contribution pu/SP pu * 100

=$6/$20 * 100 = 30%

If sale increase by $56000, Net operating income increase = $56000 * 30% = $16800