Question

Menlo Company distributes a single product. The company's sales and expenses for last month follow. Per Unit $20 Sales Variable expenses Contribution margin Fixed expenses Net operating income Total $ 314,000 219.800 94,200 75.600 $ 18.600 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 $34,200? 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 597,000 per month and there is no change in fixed expenses by how much would you expect monthly net operating income to increase?

Answer 1

Requirement 1
Break even in unit sales	= Fixed expenses/ Contribution margin per unit
	= 75,600/6
	= 12,600 units
Break even in dollar sales	= Fixed expenses /CM Ratio
CM ratio = Contribution margin /Sales	= 6/20 = 0.3 or 30%
Break even in dollar sales	= 75,600/30%
	= $252,000
Requirement 2
Contribution margin at the break even point is equal to fixed expenses
So, contribution margin is $75,200
Requirement 3a
Required units to be sold to attain a target profit of $34,200
Target profit	34200
Add: Fixed cost	75600
Required contribution	109800
Units to be sold ($109,800/$6)	18,300 units
Requirement 3b
Sales	366000
Variable expenses	256200
Contribution margin	109800
Fixed Expenses	75600
Net Operating income	34200
Requirement 4
margin of safety in dollar	= Actual sales - Break even sales
	= 314,000 -252000
	=$62,000
margin of safety percentage	= (Actual sales - Break even sales)/ Actual Sales *100
	= (314,000 -252,000)/314,000 *100
	= 19.75%
Requirement 5
CM ratio = Contribution margin /Sales	= 6/20 = 0.3 or 30%
Sales	411000
Variable expenses	287700
Contribution margin	123300
Fixed Expenses	75600
Net Operating income	47700
Increase in monthly net operating income is $29,100 ($47,700-18,600)