Question

In: Accounting

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

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

Total Per Unit
Sales $ 612,000 $ 40
Variable expenses 428,400 28
Contribution margin 183,600 $ 12
Fixed expenses 147,600
Net operating income $ 36,000


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 $63,600?

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 $53,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Solutions

Expert Solution

  • All working forms part of the answer
  • [1]

A

Fixed Expenses

$147,600

B

CM per unit

$12

C = A/B

Break even point in units

12300

D

Sale price per unit

$40

E = C x D

Break even point in dollars

$492,000

  • [2] Total COntribution margin at Break even point = Total Fixed expenses = $ 147600
  • [3A]

A

Target Profits

$63,600

B

Fixed Expenses

$147,600

C = A+B

Total Contribution margin required

$211,200

D

CM per unit

$12

E = C/D

Units required to be sold

17600

  • [3B]

Amount

per unit

Sales [17600 x $ 40]

$704,000

$40

Variable expenses

$492,800

$28

Contribution margin

$211,200

$12

Fixed expenses

$147,600

Net Operating income

$63,600

  • [4]

A

Break even point in dollars

$492,000

B

Total Sales

$612,000

C = B - A

Margin of safety in Dollars

$120,000

D = (C/A) x1 00

MOS %

19.61%

  • [5]

A

CM per unit

$12

B

Sale price per unit

$40

C = (A/B) x 100

CM Ratio

30%

D

Increase in Sale

$53,000

E = C x D

Increase in Net Income

$15,900


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