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		72,600
Net operating income	$	18,000

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 $40,800?

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 $88,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

SOLUTION

1. Break even point in unit sales = Fixed costs / Contribution margin per unit

= $72,600 / $6 = 12,100 units

Contribution margin ratio = Contribution margin ./ sales * 100

= $6 / $20 * 100 = 30%

Break even point in sales dollar = Fixed costs / Contribution margin ratio

= $72,600 / 30% = $242,000

2. Contribution margin at breakeven = Contribution margin per unit * Breakeven units

= $6 * 12,100 units = $72,600

3A. Required sales units =   (Fixed costs + Target profit)/ Contribution margin per unit

= ($72,600 + $40,800) / $6

= $113,400 / 6 = 18,900 units

3B. Income statement-

Particulars	Amount ($)
Sales (18,900*20)	378,000
Variable cost (18,900*14)	264,600
Contribution margin	113,400
Fixed costs	72,600
Net operating income	40,800

4. Margin of safety in dollars= Actual sales - Break even sales

= $302,000 - $242,000 = $60,000

Margin of safety in percentage = Margin of safety in dollars / Actual sales * 100

= $60,000 / $302,000 * 100 = 19.87%

5. Contribution margin ratio = Contribution margin ./ sales * 100

= $6 / $20 * 100 = 30%

Increase in income = Increase in sales * Contribution margin ratio

= $88,000 * 30% = $26,400