Question

need help with requirement 3B, 4, and 5. Thank you in advance.

Exercise 5-18 (Static) Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio (LO5-1, LO5-3, LO5-5, LO5-6, LO5-7) Menlo Company distributes a single product. The company's sales and expenses for last month follow: Per Unit Sales Variable expenses Contribution margin Fixed expenses Net operating income Total $ 450,000 180,000 270,000 216,000 $ 54,000 $ 30 12 $ 18 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 $90,000? 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 $50,000 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. < Prev 10 of 10 Next >

Answer 1

Answer -

1. Answer -

Break-even point in unit sales = 12,000 units

Break-even point in sales dollars = $360,000

Calculation:

Here,

Contribution margin per unit = Sales per unit - Variable expenses per unit

= $30 - $12

= $18

Contribution margin ratio = (Contribution margin / Sales) * 100

= ($270,000 / $450,000) * 100

= 60%

Now,

Break-even point in unit sales:

= Fixed expenses / Contribution margin per unit

= $216,000 / $18

= 12,000 units

And

Break-even point in sales dollars:

= Fixed expenses / Contribution margin ratio

= $216,000 / 60%

= $360,000

2. Answer -

Total contribution margin = $216,000

Calculation:

Here, the total contribution margin is equal to the fixed expenses because at the break-even point the operating income for the company is zero and operating income is the difference between contribution margin and fixed expenses.

So,

Total contribution margin / Fixed expenses = Break-even point in unit sales * Contribution margin per unit

= 12,000 units * $18 per unit

= $216,000

3a. Answer -

Units sales needed to attain target profit = 17,000 units

Calculation:

Units sales needed to attain target profit of $90,000:

= (Fixed expenses + Target profit) / Contribution margin per unit

= ($216,000 + $90,000) / $18 per unit

= 17,000 units

3b. Answer -

Menlo Company
Contribution Income Statement
	Total	Per unit
Sales	$510,000	$30
Variable expenses	$204,000	$12
Contribution margin	$306,000	$18
Fixed expenses	$216,000
Net operating income	$90,000

Calculation:

Sales = Sales per unit * Target sales level

= $30 per unit * 17,000 units

= $510,000

Variable expenses = Variable expenses per unit * Target sales level

= $12 per unit * 17,000 units

= $204,000

Contribution margin = Sales - Variable expenses

= $510,000 - $204,000

= $306,000

Operating income = Contribution margin - Fixed expenses

= $306,000 - $216,000

= $90,000

4. Answer -

	Dollars	Percentage
Margin of safety	$90,000	20%

Calculation:

Margin of safety in dollars = Sales - Break-even sales in dollars

= $450,000 - $360,000

= $90,000

Margin of safety in percentage = (Margin of safety in dollars / Sales) * 100

= ($90,000 / $450,000) * 100

= 20%

5. Answer -

CM ratio	60%
Net operating income increases by	$30,000

Calculation:

CM ratio (Contribution margin ratio):

= [(Sales per unit - Variable expenses per unit) / Sales per unit] * 100

= [($30 per unit - $12 per unit) / $30 per unit] * 100

= 60%

Here,

As per the given information, no change in fixed expenses. Therefore, the increase in contribution margin equal to the increase in net operating income.

So,

Increase in contribution margin or Net operating income increases by:

= Increase in sales * Contribution margin ratio

= $50,000 * 60%

= $30,000