Question

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		74,400
Net operating income	$	18,600

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 $33,600?

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 $63,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Answer-1)- The break-even in monthly unit sales is =12400 units.

The break-even in monthly dollar sales is =248000.

Explanation = Break even in unit sales = Fixed costs/Contribution margin per unit

= $74400/$6 per unit

= 12400 units

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

= $74400/30%

= $248000

Where Contribution margin ratio= (Contribution margin /Sales value)*100

=($93000/$310000)*100

=30%

2)- Without resorting to computations, the total contribution margin at the break-even point is = $74400.

Explanation- Contribution margin at the break-even point = Break even dollar sales* Contribution margin ratio

= $248000*30%

= $74400

3-a)- Units sales to attain target profit = (Fixed costs+ Target Profit)/Contribution margin per unit

= ($74400+$33600)/$6 per unit

= 18000 units

3-b)-

MENLO COMPANY
Operating income
Particulars		Amount
		$
Sales	180000 unit*$20 per unit	360000
Less:- Variable cost	180000 unit*$14 per unit	252000
Contribution		108000
Less:- Fixed costs		74400
Net operating income		33600

4)-Margin of safety in $ = Actual sales – Break even sales

= $310000-$248000

= $62000

Margin of safety ratio = (Margin of safety sales/Actual sales)*100

= ($62000/$310000)*100

= 20%

5)- The company’s CM ratio =30%.

If sales increase by $63,000 per month and there is no change in fixed expenses, the monthly net operating income to increase by = $18900 ($37500-$18600).

Explanation-

MENLO COMPANY
Operating income
Particulars		Amount
		$
Sales	($310000+$63000)	373000
Less:- Variable cost	$373000*70%	261100
Contribution		111900
Less:- Fixed costs		74400
Net operating income		37500