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 $ 310,000 217,000 93,000 74,400 $ 18,600 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 $27,600? 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 rao? If sales increase by $65,000 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

BREAK EVEN POINT(UNITS)=12400 UNITS

BREAK EVEN POINT(DOLLOR)=$248000

WORKINGS

BEP(UNITS)=FIXED COST/SALES PER UNIT- VARIABLE COST PER UNIT

=74400/6=12400 UNITS

BEP(DOLLOR)=BEP(UNIT)*S.P PER UNIT

=12400*20=248000

ANSWER 2

CONTRIBUTION MARGIN AT BEP=$74400(12400*6)

NOTE:-WE CAN TELL CONTRIBUTION MARGIN AT BEP WITHOUT COMPUTATION ALSO WE JUST HAVE TO SEE THE FIXED COST BECAUSE AT BEP FIXED COST=CONTRIBUTION MARGIN

ANSWER 3(a)

NO. OF UNIT SOLD TO ATTAIN TARGET PROFIT=17000 UNITS

WORKING

=FIXED COST+TARGET PROFIT/CONTRIBUTION MARGIN PER UNIT

=74400+27600/6=17000 UNITS

ANWER3(b)

COMPUTATION OF INCOME STATEMENT

DETAILS	AMOUNT($)
SALES(17000*20)	340000
VARIABLE COST(17000*14)	(238000)
CONTRIBUTION	102000
FIXED COST	(74400)
NET INCOME	27600

ANSWER 4

MARGIN OF SAFETY(DOLLOR)=$62000

MARGIN OF SAFETY(%)=20%

WORKINGS

MOS($)=CURRENT SALES-BEP($)=$310000-$248000=$62000

MOS(%)=MOS($)/CURRENT SALES*100%=$62000/$310000*100%=20%

ANSWER 5

CM RATIO=30%

NET OPERATING INCOME INCREASE =19500

WORKINGS

CM RATIO=CONTRIBUTION MARGIN/SALES*100%=93000/310000*100%=30%

NEW SALES =$310000+$65000=$375000

NEW SALES UNITS=$375000/$20=18750 UNIT

NEW VARIABLE COST=$14*18750=262500

STATEMENT OF NET OPERATING INCOME

DETAILS	AMOUNT($)
SALES(20*18750)	375000
V.C(14*18750)	262500
CONTRIBUTION	112500
FIXED COST	74400
NET OPRATING INCOME	38100

NET OPERATING INCREASE=38100-18600=19500