Question

Wesley Company manufactures and sells a single product. The company’s sales and expenses for last quarter follow:

	Total			Per Unit
Sales	$	750,000		$	30
Less: Variable expenses		525,000			21
Contribution margin		225,000		$	9
Less: Fixed expenses		180,000
Net operating income	$	45,000

Required:

1.	What is the quarterly break-even point in units sold and in sales dollars?

      

2.	Without resorting to computations, calculate the total contribution margin at the break-even point.

      

3.	How many units would have to be sold each quarter to earn a target profit of $36,900? Use the formula method.

      

4.	Refer to the original data. Compute the company’s margin of safety for the quarter in both dollar and percentage terms. (Round "Percentage" answer to 1 decimal place, (i.e., 0.123 should be considered as 12.3%).)

      

5.	What is the company’s CM ratio? If quarterly sales increase by $22,500 and there is no change in fixed expenses, by how much would you expect quarterly net operating income to increase? (Do not prepare an income statement; use the CM ratio to compute your answer.)

       

Answer 1

Answers

• [1]

A	Fixed expenses	$180,000
B	Contribution margin per unit	$9
C = A/B	Break even point in units	20000
D = C x $ 30	Break even point in sales $	$600,000

• [2]

Total contribution margin at break even point = Fixed expenses = $ 180,000

• [3]

Units required to be sold = (Target profit + Fixed expenses) / Contribution margin per unit
= ($36900 + 180000) / $ 9
= 216900 / 9
= 24,100 units

• [4]

A	Total Sales	$750,000
B	Break even point in sales $	$600,000
C = A - B	Margin of Safety $	$150,000
D = C/A) x 100	Margin of Safety %	20%

• [5]

A	Contribution margin per unit	$9
B	Sale price per unit	$30
C = (A/B) x 100	CM Ratio	30%
D	Increase in sales	$22,500
E = C x D	Increase in Net Operating Income	$6,750