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: Per Unit $20 14 Sales Variable expenses Contribution margin Fixed expenses Net operating income Total $ 310,000 217,000 93,000 73,200 $ 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 $90,000 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. Reg 1 Reg 2 Req 3A Req 3B Reg 4 Reg 5 What is the monthly break-even point in unit sales and in dollar sales? units Break-even point in unit sales Break-even point in dollar sales

Answer 1

73200 30% 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) 2.Brake Even in Dollar sales =( Fixed Cost/ CM ratio) 2. Determine the Contribution Margin at the Break even point Contribution Margin at the Break even point = Fixed Cost 3. a) Units to get the target profit of $35400 (Fixed cost + target profit / CM per unit 12200 Units 244000 Dollars 73200 18100

3.B) Verify the answer with Contribution margin Income Statement Contribution Margin Statement Total sale Varaible Expenses Contibution margin Fixed Expenses Net Operating Income 4. Compute the Margin of Safety Margin of Safety in dollars =(units *selling price - BEP Dollars) Margin of Safety in Percentage =(Margin of safety Dollars / Actual sales ) Per unit 362000 20 253400 108600 73200 35400 66000 Dollars 21.29% Percent CM Ratio =( CM/Selling Price) Net Operating Income Increased by (0.30*90000) 30% 27000