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: Sales Variable expenses Contribution margin Fixed expenses Net operating income Total $ 608,000 425,600 182,400 154,800 $ 27,600 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 $57,600? 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 $95,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Req 1	Break even(units) = total fixed cost/contribution margin per unit
			154800/12
			12900	units
	Break even(sales) =		12900*40
			516000
	Break even point in unit sales			12,600	units
	Break even point in dollar sales			516000
Req 2	total contribution margin			154,800
Req 3
3a)	units to be sold =(total fixed cost+target profit)/contribution margin per unit
			(154800+57600)/12
			17700	units
	unit sales needed to attain target profit				17,700	units
3b)		Contribution income statement
				total	per unit
	Sales			708000	40
	variable expenses			495600	28
	contribution margin			212400	12
	fixed expenses			154,800
	net operating income			57,600
4)	Margin of safety = actual sales - BEP sales
			608000-516000
			92000
	Margin of safety(%) = margin of safety/actual sales
			92000/608000
			15.13%
			Dollars	percentage
	Margin of safety		92000	15.13%
5)	CM ratio = 12/40
		30.00%
	net operating income will increase by 95000*30%
				28500
	CM ratio				30%
	net operating income increases by				28,500