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 $ 624,000 436,800 187,200 145,200 $ 42,000 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 $64,800? 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 $64,000 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. Req 1 Reg 2 Req ЗА Req 3B Req 4 Req 5 What is the monthly break-even point in unit sales and in dollar sales? units Break-even point in unit sales Break-even point in dollar sales < Req 1 Req2 >

Answer 1

Answer:

1. Calculstion of monthly break-even point in units & dollar sales:

Break-even point (In units) = Fixed Costs / Contribution margin per unit

= $145,200 / $12

= 12,100 Units

Break-even point (In dollar sales) = Breakeven Units x Selling price per unit

= 12,100 Units x $40

= $484,000

Therefore,

Break-even point in unit sales	12,100	Units
Break-even point in dollar sales	$484,000

2. Total contribution margin at the break-even point is equal to fixed costs, therefore, Total contribution margin is $145,200.

3-a. Determination of units required to be sold each month to attain a target profit of $64,800:

Desired sales units = (Fixed costs + Target profit) / Contribution margin per unit

= ($145,200 + $64,800) / $12

= $210,000 / $12

= 17,500 units

Therefore,

Units sales needed to attain target profit

$17,500 Units

3-b. Verification of target profit using contribution format income statement:

Particulars	Total	Per Unit
Sales (17,500 units x $40)	$700,000	$40
Variable expenses (17,500 units x $28)	($490,000)	($28)
Contribution margin	$210,000	$12
Fixed expenses	($145,200)
Net operating income	$64,800

4. Calculation of margin of safety in both dollar & percentage terms:

Margin of safety = Net operating income / Contribution margin per unit

= $42,000 / $12

= 3,500 Units

Margin of safety (In dollar) = 3,500 units x $40

=$140,000

Margin of safety (%) = {(Total sales - Break-even sales) / Total sales} x 100

= {(624,000 - 484,000) / $624,000} x 100

= 22.44%

Therefore,

	Dollars	Percentage
Margin of safety	$140,000	22.44%

5. Calculation of company's CM Ratio:

CM Ratio = (Contribution margin per unit / Sales per unit) x 100

= ($12 / $40) x100

= 30%

If sales increase by $64,000 and there is no changes in fixed expenses then net operating income would be increased by $12,800 (64,000 x 30%).

Therefore,

CM Ratio	30%
Net operating income increases by	$12,800