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 $ 640,000 448,000 192,000 148,800 $ 43,200 Per Unit $ 40 28 $ 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 $61,200? 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 the company can sell more units thereby increasing sales by $96,000 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:

= $148,800 / $12

= 12,400

Dollars:

= $148,800 / 30%

= $496,000

2.

At Breakeven point contribution margin is equal to fixed cost of $148,800

3a.

Units sales:

= ($148,800 + $61,200) / $12

= 17,500

3b.

	Total	Per unit
Sales	$700,000	$40
Variable expenses	$490,000	$28
Contribution margin	$210,000	$12
Fixed expenses	$148,800
Net operating income	$61,200

4.

Margin of safety:

Dollars:

= $640,000 - $496,000

= $144,000

Percentage:

= ($640,000 - $496,000) / $640,000

= 22.50%

5.

Comtribution margin ratio = 30% (Calculated at the beginning)

Net operating income increases by $28,800 (ie. $96,000 X 30%)