Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow:

	Total			Per Unit
Sales	$	624,000		$	40
Variable expenses		436,800			28
Contribution margin		187,200		$	12
Fixed expenses		150,000
Net operating income	$	37,200

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 $74,400?

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 sales increase by $70,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Req 1 Req 2 Req ЗА Req 3B Req 4 Req 5 Verify your answer by preparing a contribution format income statement at the target sales leve Menlo Company Contribution Income Statement Total Per Unit Sales Variable expenses Contribution margin 0 $ 0 Fixed expenses Net operating income 0

Answer 1

1 Calculate the break even unit sales: Break even point = fixed cost/contribution per unit =150000/(12) =12500 units Contribution margin ratio =Contribution per unit/Sale price per unit* 100 =12/40*100 =0.3or 30% Calculate the break even unit dollars: Break even point = fixed cost/contribution margin ratio =150000/30% =500000 2 Total contribution margin at the break even point: Total Contribution =Break even units* contribution per unit =12500*12 =150000 3a. Calculate the number of units to be sold: Sales Revenue =(fixed costs+Target profit)/Contribution margin per unit =(150000+74400/12 =224400/12 =18700 units 3b. Contribution Format Income statement: Particulars Amount Sales Revenue $ 7,48,000 18700*40 Less:Variable expenses $ 5,23,600 18700*28 Contribution $ 2,24,400 Fixed expenses $ 1,50,000 Net Operating Income $ 74,400 4 Company's margin of safety in dollars: Margin of safety in dollars) =actual sales-break sales =624000-500000 =124000 Company's margin of safety pecentage Margin of safety(%) =(actual sales-break sales)/actual sales =(624000-500000)/624000 =124000/624000 =19.87% 5 Increase in Income Contribution ratio =30% Increase in Income = 70000*30% =21000 Hence, Sles increase by 70000, results increase in income by 21000