Question

Sales Variable expenses Contribution margin Fixed expenses Net operating income Total $ 310,000 217,000 93,000 76,800 $ 16,200 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 the company can sell more units thereby increasing sales by $98,000 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:

= $6 / $20

= 30%

1.

Breakeven point:

Unit sales:

= $76,800 / $6

= 12,800 units

Dollar sales:

= $76,800 / 30%

= $256,000

2.

Contribution margin at breakeven point is equal to fixed cost of $76,800.

3-a.

Unit sales to attain target profit:

= ($76,800 + $34,200) / $6

= 18,500

3-b.

Sales	$370,000
Variable expense	$259,000
Contribution margin	$110,000
Fixed expense	$76,800
Net operating income	$34,200

(Per unit column remains same as in the question)

4.

Margin of safety in dollars:

= $310,000 - $256,000

= $54,000

Margin of safety in percentage:

= $54,000 / $310,000

= 17.42%

5.

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

Increase in net operating income:

= $98,000 X 30%

= $29,400