Question

Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month’s budget appear below:

Selling price		$27	per unit
Variable expenses		$12	per unit
Fixed expenses		$12,300	per month
Unit sales		970	units per month

Required:
1.	Compute the company’s margin of safety. (Do not round intermediate calculations.)

     
  

2.	Compute the company’s margin of safety as a percentage of its sales. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

     

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

	Total			Per Unit
Sales	$	310,000		$	20
Variable expenses		217,000			14
Contribution margin		93,000		$	6
Fixed expenses		76,800
Net operating income	$	16,200

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 earn a target profit of $34,200? 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 $56,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

        

Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows:

   

		Amount	Percent of Sales
Sales	$	143,000	100%
Variable expenses		57,200	40%
Contribution margin		85,800	60%
Fixed expenses		17,000
Net operating income	$	68,800

   

Required:
1.	Compute the company’s degree of operating leverage. (Round your answer to 2 decimal places.)

     

2.	Using the degree of operating leverage, estimate the impact on net operating income of a 16% increase in sales. (Round your intermediate calculations to 2 decimal places. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).)

         

3.	Construct a new contribution format income statement for the company assuming a 16% increase in sales.

     

Answer 1

Break even Units =fixed costs/(selling price per unit-variable cost per unit)

= 12,300/(27-12)

=820 units

Margin of safety = sales - break even sales

= 970-820 =150 units

I.e. $150*27 =$4,050

Margin of safety % =150/970

= 15.4639%

I.e. 15.46%

Break even point in unit sales = fixed costs/contribution margin per unit

=76,800/6

= 12,800 units

Dollar sales = 12,800*20 =$256,000

Contribution margin at break even point = fixed costs

=$76,800

Units required =(target profit+fixed costs)contribution margin per unit

=(34200+76800)/6

= 18,500 units

Contribution format income statement

Sales = 370,000

Less:variable expenses =$259,000

Contribution margin =$111,000

Less: fixed expenses =$76,800

Operating income =$34200

Margin of safety = sales- break even sales

=310,000 - 256,000

=$54,000

% =54,000/310,000

=17.42%

CM ratio =6/20 = 30%

Change in operating income will be equal to change in contribution margin

=56,000*30% =$16,800