Question

Menlo Company distributes a single product. The company's sales and expenses for last month follow: Sales Variable expenses Contribution margin Fixed expenses Net operating income Total $ 620,000 434,000 186,000 145,200 $ 40, 800 Per Unit $ 40 28 $ 12 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 $81,600? 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 $81,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

1) Break even unit = Fixed cost/Contribution margin per unit = 145200/12 = 12100 Units

Break even sales = 12100*40 = $484000

2) Total Contribution margin at break even = 145200

3a) Required unit = (145200+81600)/12 = 18900 Units

3b) Contribution margin income statement

Sales (18900*40)	756000
Variable cost (18900*28)	529200
Contribution margin	226800
Fixed cost	145200
Net income	81600

4) Margin of safety (dollars) = 620000-484000 = 136000

Margin of safety (%) = 136000/620000 = 21.94%

5) CM ratio = 12/40 = 30%

Increase in net income = 81000*30% = 24300