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		77,400
Net operating income	$	13,200

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 $26,400?

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 $89,000 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 Break even point in unit = fixed cost / contribution margin per unit

Contribution margin per unit = selling price - variable cost per unit

Contribution margin per unit = 20 - 14 = 6

Break even point in unit = 77400 / 6 = 12900 units

Break even point in sales = break even point in unit × selling price

Break even point in sales = 12900 × 20 = 258000

2 Break even point is the point at which there is no profit and no loss . So the total contribution margin at break even point is equal to the fixed cost. In this case the fixed cost is 77400 so the total contribution margin is 77400.

Total contribution margin = fixed cost

Total contribution margin = 77400

3 unit sold to earm a profit = ( fixed cost + desired profit ) / contribution margin per unit

How many unit sold to Desired to earn a profit of 26400

= (77400 + 26400 ) / 6 = 17300 units

4 margin of safety in dollar = actual sales - break even sales

Margin of safety = 302000 - 258000 = 44000

Margin of Safety in percentage = margin of safety in dollar / actual sales × 100

Margin of safety in percentage =( 44000 / 302000 ) × 100

= 14.56%

5 contribution margin ratio = (contribution margin / sales)× 100

   = ( 6 / 20 ) × 100 = 30%

If the sales increase by 89000

Total sales = 302000 + 89000 = 391000

After the increase in sales the contribution margin

= sales × contribution margin ratio

= 391000 × 30% = 117300

Therefore the net income = 117300 - 77400 = 39900

The above are the detailed calculations and equations