Question

Total			Per Unit
Sales	$	318,000		$	20
Variable expenses		222,600			14
Contribution margin		95,400		$	6
Fixed expenses		72,600
Net operating income	$	22,800

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 $39,600?

3-b. Verify your answer by preparing a contribution format income statement at the target sales level. (confused on this)

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 $99,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

1. Monthly break-even point in unit sales and in dollar sales
Description	Amount ($)	Per unit
Sales	318,000	20
Less: Variable Cost	222,600	14
Contribution Margin	95,400	6
Contribution Margin ratio (Contributin Margin/Sales)	30%	30%
Fixed Costs	72,600	72,600
Break even point (in units) = Fixed Costs/Contribution Margin per unit		12,100
Break even point (in dollars) = Fixed Costs/Contribution Margin ratio	242,000
2. Total contribution margin at the break-even point
Description	Amount ($)
Sales	318,000
Less: Variable Cost	222,600
Contribution Margin (Sales-Variable Costs)	95,400
3a. Units would have to be sold each month to attain a target profit of $39,600
Sale units (Target Profit+ Fixed Costs)/ Contribution Margin per unit
(39,600+72,600)/6	18,700
3b. Contribution format income statement at the target sales level is
Description	Amount ($)
Sales	374,000
Less: Variable Cost	261,800
Contribution Margin (b)	112,200
Less: Fixed Cost	72,600
Net Income	39,600
4. company's margin of safety in both dollar and percentage terms.
Description	Per unit
Sales	20
Less: Variable Cost	14
Contribution Margin	6
Contribution Margin Ratio	30.00%
Less: Fixed Cost	72,600
Break even sales in units (Fixed Cost/Cont Margin per unit)	12,100
Particulars	Total
Actual Sales (a)	318,000
Break Even sales (b)	242,000
Margin of safety (Total sales minus break even sales) (c )	76,000
Margin of safety (as a percentage of sales) c/a*100	24%
5. company’s CM ratio is Contribution Margin ratio/Sales	30%
Description	Amount ($)	Per Unit	Units
Sales	408,000	20	20400
Less: Variable Cost	285,600	14	20400
Contribution Margin (b)	122,400
Less: Fixed Cost	72,600
Net Income	49,800
Net Income will increase by	10,200