Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow:

	Total			Per Unit
Sales	$	312,000		$20
Variable expenses		218,400		14
Contribution margin		93,600		$6
Fixed expenses		74,400
Net operating income	$	19,200
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 earn a target profit of $39,600? Use the formula method. 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. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34). 5. What is the company’s CM ratio? If monthly sales increase by $90,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

		Total		Per Unit		No of Units
1	sales	$312,000		$20		15600	( 312000/20)
	Variable Expenses	$      218,400		$14
	Contribution Margin	$         93,600		$6
	Fixed Expenses	$         74,400
	Break Even Point in unit sales( Fixed Cost/ Contribution per unit)	12400	( 74400/6)
	Break Even point in dollar sales	$248,000	( 12400*20)
	( Break even in units* sales per unit)
2	Contribution at Break Even
	Contribution margin per unit	$6
	Break even sales in units	12400.00
	Contribution at Break Even	$         74,400
	( Break Even units* contribution per unit)
3-a	Units to earn profit of $ 39600
	=	Fixed Cost+Targeted profit/ contribution per unit
		(74400+39600)/6
		114000/6
	Units to earn profit of $ 39600 =	19000	units
3-b		Total
	No of Units (a)	19000
	Sales price per unit (b)	20
	Variable Cost per unit (c )	14
	sales ( a*b)	$380,000
	Variable Expenses (a*c)	$      266,000
	Contribution Margin	$      114,000
	Fixed Expenses	$         74,400
	Net Operating Income	$         39,600
4	Margin of Safety
		Total		Per Unit		No of Units
	sales	$312,000		$20		15600	( 312000/20)
	Variable Expenses	$      218,400		$14
	Contribution Margin	$         93,600		$6
	Fixed Expenses	$         74,400
	Break Even Point in unit sales( Fixed Cost/ Contribution per unit)	12400	( 74400/6)
	Margin of Safety in unit sales	3200	(15600-12400)
	( Total unit Sales-Break Even Sales)
	Break Even point in dollar sales	$248,000	( 12400*20)
	( Break even in units* sales per unit)
	Margin of Safety in dollars	64000	(312000-248000)
	( Total Sales-Break Even Sales)