Question

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?

Answer 1

• 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