Question

Exercise 5-18 (Algo) 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: Per Unit $ 40 28 Sales Variable expenses Contribution margin Fixed expenses Net operating income Total $ 624,000 436,800 187,200 151,200 $ 36,000 $ 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 $68,400? 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 the company can sell more units thereby increasing sales by $52,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Contribution margin ratio:

= $12 / $40

= 30%

1)

Breakeven point:

Units:

= $151,200 / $12

= 12,600

Dollars:

= $151,200 / 30%

= $504,000

2)

Total contribution margin = $151,200

3A)

Unit sales to attain target profit:

= ($68,400 + $151,200) / $12

= 18,300

3B)

	Total	Per Unit
Sales	$732,000	$40
Variable expenses	$512,400	$28
Contribution margin	$219,600	$12
Fixed expense	$151,200
Net operating income	$68,400

4)

Margin of safety:

Dollars:

= $624,000 - $504,000

= $120,000

Percentage:

= ($624,000 - $504,000) / $624,000

= 19.23%

5)

CM ratio = 30% (Calculated above)

Net operating income increased by:

= $52,000 X 30%

= $15,600