Question

PROBLEM 4-22 Break-Even Analysis: Target Profit Analysis; Margin of Safety: CM Ratio ILOI. LO3, LO5, L06, L07) Menlo Company distributes a single product. The company's sales and expenses for last month follow: Total Per Unit $30 ....................... $450,000 Variable expenses....... 180.000 Contribution margin..... 270,000 Fixed expenses ........... 216.000 Operating income......... ... $ 54.000 $18 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. How many units would have to be sold each month to earn a target profit of $90,0007 Verify your answer by preparing a contribution format income statement at the target sales level. Refer to part 3 and now assume that the tax rate is 30%. How many units would need to be sold each month to an after-tax target profit of $90,000? 5. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. 6. What is the company's CM ratio? If sales increase by $50,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? 11

Answer 1

Please find below table useful to compute desired results: -

450000 180000 |=B1-B2 216000 =B3-B4 30 12 |=C1-C2 1 Sales 2 Variable Expenses 3 Contribution Margin 4 Fixed Expenses 5 Operating Income 7 Break-even Point in units sold 8 Break-even Point in sales dollars 9 Total Contribution Margin at Break even 10 Target Profit |=B4/C3 =B7*C1 |=B4 90000 11 Number of Units to be sold to earn target profit =B10+B9)/C3 =B11*C1 |=B11*C2 =B12-B13 216000 =B14-B15 12 Sales 13 Variable Expenses 14 Contribution Margin 15 Fixed Expenses 16 Operating Income =30/100 17 Tax rate =B10/(1-B17) =B18+B9)/C3 18 Target Profit before tax 19 Number of Units to be sold to earn target profit 20 |=B1-B8 21 Margin of Safety 22 Margin of Safety %age of sales |=B21/B1 No effect on CM ratio 23 Increase in sales leads to

End results would be as follows: -

450,000 30 180,000 12 270,000 18 Sales 2 Variable Expenses Contribution Margin Fixed Expenses 5 Operating Income 3 216,000 4 54,000 7 Break-even Point in units sold 8 Break-even Point in sales dollars Total Contribution Margin at Break even 10 Target Profit 11 Number of Units to be sold to earn target profit 12,000 360,000 216,000 90,000 17,000 510,000 12 Sales 13 Variable Expenses 204,000 306,000 14 Contribution Margin 15 Fixed Expenses 216,000 16 Operating Income 90,000 30% 17 Tax rate Target Profit before tax Number of Units to be sold to earn target profit 128,571 18 19,143 19 20 21 Margin of Safety 22 Margin of Safety %age of sales 90,000 20% Increase in sales leads to No effect on CM ratio 23