Question

Menlo Company distributes a single product. The company's sales and expenses for last month follow: Per Unit $20 14 Sales Variable expenses Contribution margin Fixed expenses Net operating income Total $ 312,000 218,400 93,600 73,800 $ 19,800 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 $31,800? 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 $83,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Requirement: 1 BEP Units Fixed Expenses/Unit Contribution margin per unit Fixed Expenses Unit contribution margin Monthly Break even point units sales 73800 6.00 12300 units BEP Sales in Dollars Fixed Expenses /Unit Contribution margin Ratio Fixed Expenses Contribution margin Ratio Monthly Breakeven point Dollars sales 73800 0.30 246000 Requirement: 2 Total Contribution margin at Break even point 73800 Requirement: 3a Units sales needed to attain target profit (Fixed expenses+ Target profit) / Unit Fixed expenses Target profit Unit Contibution margin Unit sales needed to attain target profit 73800 31800 6.00 17600

Requirement: 3b Menlo Company Contribution Income Statement Total Per Unit Sales Variable expenses Contribution margin Fixed expenses Net Operating income 352000 20 14 246400 105600 6 73800 31800 Requirement: 4 Margin of safety Dollars = Actual sales - Bep sales Actual sales Bep sales Margin of safety Dollars 312000 246000 66000 Margin of safety Percentage =(Margin of safety /Actual sales ) *100 Margin of safety 66000 Actual sales 312000 Margin of safety Percentage 21.15%

Requirement: 5 Contribution margin Ratio Contribution margin /Sales Contribution margin Selling price per unit Contribution margin ratio 6.00 20.00 30.00 % Expected total contibution margin (395,000* 30%) Present total contribution margin (312,000 30%) Net operating income increased by 118500 93600 24900