Question

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

	Total			Per Unit
Sales	$	616,000		$	40
Variable expenses		431,200			28
Contribution margin		184,800		$	12
Fixed expenses		154,800
Net operating income	$	30,000

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 $66,000?

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

SOLUTION

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

= $154,800 / $12 = 12,900 units

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

= $154,800 / 30% = 516,000

Contribution margin ratio = Contribution margin per unit / Sales

= $12 / $40 = 30%

2. Contribution margin at break even point = Contribution margin per unit * Break even point in units

= $12 * 12,900 units = $154,800

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

= ($154,800 ++ $66,000) / $12

= 220,800 / 12 = 18,400 units

3B. Contribution format income statement-

Particulars	Amount ($)
Sales (18,400*$40)	736,000
Less: Variable costs (18,400*$28)	515,200
Contribution margin (18,400*$12)	220,800
Less: Fixed costs	(154,800)
Net operating income	66,000

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

= 616,000 - 516,000 = $100,000

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

= $100,000 / 616,000 * 100 = 16.23%

5. Contribution margin ratio = Contribution margin per unit / Sales

= $12 / $40 = 30%

Increase in income = Increase in sales * Contribution margin ratio

= $89,000 * 30% = $26,700