Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow:

Total $ 636,000 445, 200 Sales Variable expenses Contribution margin Fixed expenses Net operating income Per Unit $ 40 28 $ 12 190,800 145,200 $ 45,600 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 $66,000? 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 $76,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Answer -

1. Answer -

Monthly break-even point (in unit sales):

= Fixed expenses / Contribution margin per unit

= $145200 / $12

= 12100 units

Monthly break-even point (in dollar sales):

= Break-even point (in unit sales) * Sales price per unit

= 12100 * $40

= $484000

2. Answer -

The contribution margin is $145200 because the contribution margin is equal to the fixed expenses at the break-even point.

Total contribution margin at break-even point = $145200

3-a. Answer -

Unit sold to attain target profit:

= [Target profit + Fixed expenses] / Contribution margin per unit

= [$66000 + $145200] / $12

= 17600 units

3-b. Answer -

Menlo Company
Contribution Income Statement
	Total	Per unit
Sales	$704000	$40
Variable expenses	$492800	$28
Contribution margin	$211200	$12
Fixed expenses	$145200
Net operating income	$66000

Calculation:

a. Sales = [17600 units * $40 per unit] = $704000

b. Variable expenses = [17600 units * $28 per unit] = $492800

c. Contribution margin = Sales - Variable expenses = $704000 - $492800 = $211200

d. Contribution margin per unit = Sales price per unit - Variable expenses per unit = $40 - $28 = $12

e. Net operating income = Contribution margin - Fixed expenses = $211200 - $145200 = $66000

4. Answer -

Margin of safety (in dollars):

= Total sales - Break-even sales

= $636000 - $484000

= $152000

Margin of safety ( in percentage terms):

= [Margin of safety in dollars / Total sales] * 100

= [$152000 / $636000] * 100

= 23.90%

5. Answer -

Contribution margin ratio (CM ratio):

= [(Sales price per unit - Variable expenses per unit) / Sales price per unit] * 100

= [($40 - $28) / $40] * 100

Contribution margin ratio (CM ratio) = 30%

And

Total contribution margin = Total sales * Contribution margin ratio

Total contribution margin = $636000 * 30%

Total contribution margin = $190800

Here,

Sales increase by $76000 per month and there is no change in fixed expenses.

So, Expected total sales = $636000 + $76000 = $712000

And

Expected total contribution margin = Expected total sales * Contribution margin ratio

Expected total contribution margin = $712000 * 30%

Expected total contribution margin = $213600

Then,

Increased total contribution margin = Expected total contribution margin - Total contribution margin

= $213600 - $190800 = $22800

As per given information there is no change in fixed expenses.

So,

Increased total contribution margin = Increased net operating income

Therefore, monthly net operating income will increase by $22800