Question

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

	Total			Per Unit
Sales	$	302,000		$	20
Variable expenses		211,400			14
Contribution margin		90,600		$	6
Fixed expenses		75,600
Net operating income	$	15,000

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 $33,000?

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 sales increase by $82,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Answer 1:

Contribution margin ration = Contribution margin per unit / Sales price per unit = 6/ 20 = 30%

Monthly break-even point in unit sales = Fixed expenses / Contribution margin per unit = 75600 / 6 = 12,600 units

Monthly break-even point in dollar sales = Fixed expenses / Contribution margin ratio = 75600 / 30% = $252,000

Hence:

Monthly break-even point in unit sales = 12,600 units

Monthly break-even point in dollar sales = $252,000

Answer 2:

At break even point Profit = 0

Hence:

Contribution margin at the break-even point = Fixed expenses = $75,600

Contribution margin at the break-even point = $75,600

Answer 3 (a):

Units would have to be sold each month to attain a target profit of $33,000 = (75600 + 33000) / 6 =108600 /6 =18,100

Units would have to be sold each month to attain a target profit of $33,000 = 18,100 Units

Answer 3 (b):

Variable cost % = 14 / 20 =70%

Verified that Net Income at 18,100 sales units = $33,000

Answer 4:

Monthly break-even point in dollar sales = $252,000

Margin of safety in dollars = Sales - Break even sales = 302000 - 252000 = $50,000

Margin of safety in % = 50000 / 302000 = 16.56%

Margin of safety in dollars = $50,000

Margin of safety in % =16.56%

Answer 5:

As calculated in answer 1

CM ratio = 30%

If sales increase by $82,000, expected increase in monthly net operating income = 82000 * 30% = $24,600

If sales increase by $82,000, expected increase in monthly net operating income = $24,600