Question

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

	Total			Per Unit
Sales	$	306,000		$	20
Variable expenses		214,200			14
Contribution margin		91,800		$	6
Fixed expenses		76,200
Net operating income	$	15,600

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 $37,200?

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 the company can sell more units thereby increasing sales by $96,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Menlo Company

Contribution margin ratio = Contribution / Sales × 100

= 6 / 20 × 100 = 30%

1. Break even point (units) = Fixed cost / contribution margin per unit

= 76,200/6 = 12,700 units

Break even point ($) = Break even point × selling pric= 12,700 units × $ 20 = $ 254,000

2. Total contribution = Break even sales × contribution margin ratio

= 254,000×30% = $ 76,200

Contribution is equals to fixed cost.

3a. Units sold = (fixed cost + targeted profit)/contribution per unit

= (76,200+37,200)/6 = 18,900 units

3b. Contribution income statement.

		$
Sales	18,900 units × 20	378,000
Less: variable cost	18,900 units × 14	(264,600)
Contribution		113,400
Less: fixed cost		(76,200)
Net income		$ 37,200

4. Margin of safety ($) = Sales - Break even sales

= 306,000 + 254,000 = $ 52,000

Margin of safety (%) = margin of safety ($) / Sales

= 52,000/306,000 = 17%

5. Contribution margin = 30%

Contribution margin doesn't change as units sold Increases.

Net operating income = Sales × contribution margin - fixed cost

= (306,000 + 96,000) × 30% - 76,200

= $ 44,400