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 $ 306,000 214,200 91,800 75,000 $ 16,800 Per Unit $ 20 14 $ 6 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 $30,000? 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 $79,000 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 BEP Units = Fixed Expenses/Unit Contribution margin per unit Fixed Expenses Unit contribution margin Monthly Break even point units sales 75000 6.00 12500 units BEP Sales in Dollars = Fixed Expenses /Unit Contribution margin Ratio Fixed Expenses 75000 Contribution margin Ratio 0.30 Monthly Breakeven point Dollars sales 250000 Requirement: 2 Total Contribution margin at Break even point 75000 Requirement: 3a Units sales needed to attain target profit = (Fixed expenses + Target profit) / Unit Fixed expenses 75000 Target profit 30000 Unit Contibution margin 6.00 Unit sales needed to attain target profit 17500

Requirement: 3b Menlo Company Contribution Income Statement Per Unit Sales Variable expenses Contribution margin Fixed expenses Net Operating income Total 350000 245000 105000 75000 30000 Requirement: 4 Margin of safety Dollars = Actual sales - Bep sales Actual sales Bep sales Margin of safety Dollars 306000 250000 56000 Margin of safety Percentage =( Margin of safety / Actual sales ) *100 Margin of safety Actual sales Margin of safety Percentage 56000 306000 18.30 %

Requirement: 5 Contribution margin Ratio = Contribution margin / Sales Contribution margin Selling price per unit Contribution margin ratio 6.00 20.00 30.00 % Expected total contibution margin (385,000 * 30%) Present total contribution margin (306,000 * 30%) Net operating income increased by 115500 91800 23700