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 $ 314,000 219,800 94,200 75,000 $ 19, 200 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 $34,200? 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 $53,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? Complete this question by entering your answers in the tabs below.

Answer 1

1. Breakeven point

Breakeven point ( units ) = Fixed cost ÷ Contribution per unit

= 75000 ÷ 6 = 12500 Units

Breakeven point ( sales ) = Breakeven units × Selling price per unit

= 12500 × 20 = $ 250000

2. Contribution margin at breakeven point

Breakeven point is the sales at which there is no profit or loss for the business. At this point contribution margin will be equal to the fixed cost . In this case;

Contribution margin = $ 75000

3a.Units sold to attain target profit of $ 34200

Units sold = ( Fixed cost + Targeted profit ) ÷ Contribution per unit

= ( 75000 + 34200 ) ÷ 6

= 109200 ÷ 6 = 18200 Units

3b. Income Statement

Sales	18200 × 20	$ 364000
Less : Variable Cost	18200 × 14	$ 254800
Contribution Margin	18200× 6	$ 109200
Less : Fixed Cost		$ 75000
Net Income		$ 34200

4. Margin of Safety

Margin of Safety ( in % ) = [ ( Current sales level - Breakeven point ) / Current sales level ] × 100

= [(314000 - 250000) / 314000] × 100

= 20.38 %

Margin of Safety ( in dollars ) = Current sales level - Breakeven point

= 314000 - 250000

= $ 64000

Margin of Safety ( in units ) = Current sales unit - Breakeven units

= 15700 - 12500

= 3200 Units

5. CM Ratio

Contribution margin ratio =(Contribution ÷ Sales) × 100

= ( 94200 ÷ 314000 )× 100

= 30 %

Amount of increase in sales = $ 53000

Increase in net profit = 53000 × 30%

= $ 15900

If sales increase by $ 53000 every month, net profit will increase by $15900 in each month.

Please provide feedback if it was helpful. Feel free to comment if you have any doubts.