Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow: Total Per Unit Sales $ 620,000 $ 40 Variable expenses 434,000 28 Contribution margin 186,000 $ 12 Fixed expenses 148,800 Net operating income $ 37,200

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 $67,200?

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 $56,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Part-1

BEP in Unit Sales= Fixed Expense/ CM per Unit

=148800/12=12400 Unit

Dollar Sales = BEP Unit X Selling Price

=12400*40= $496000

Part-2

Contribution Margin at BEP= BEP Unit X Contribution mrgin Per Unit

=12400*12=148800

Part-3(a)

No of Unt for target Profit = (Fixed Expense + Target Profit )/ CM Per Unit

=(148800+67200)/12= 18000 Unit

Part-3(b) Contirbution Income Statement
Particulars	Total	Per unit
Sales (18000 units)	$720,000.00	$40.00
Variable expenses	$504,000.00	$28.00
Contribution margin	$216,000.00	$12.00
Fixed expenses	$148,800.00
Net Operating Income	$67,200.00

Part-4

Margin of Safety in Dollar= Sales - BEP Sales

=620000-496000= $124000

Margin of Safety in % = Margin of Safety sales/ Total Sales

=124000/620000= 20%

Part-5

CM Ratio= Contribution / Sales

=12/40=30%

Increse in net operatign Income = Increase inS ales X CM Ratio

=56000*30%=$16800