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		147,600
Net operating income	$	37,200

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 $74,400?

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?

3b.

Verify your answer by preparing a contribution format income statement at the target sales level.

	Menlo Company Contribution Income Statement Total Per Unit

Answer 1

1.

Contribution margin ratio = Contribution margin / Sales

= $12 / $40

= 0.3

Breakeven point in unit sales = Fixed expenses / Contribution margin per unit

= $147,600 / $12

= 12,300

Breakeven point in revenues = Fixed expenses / Contribution margin ratio

= $147,600 / 0.3

= $492,000

2.

The total contribution margin at the breakeven point is equal to the fixed expenses.

Total contribution margin = $147,600

3-a.

Units to be sold = (fixed expenses + desired profit) / contribution margin ratio

= ($147,600 + $74,400) / 12

= $18,500

3-b.

Contribution format Income statement

Sales revenues	$740,000 (18,500*$40)
Less : Variable expenses	$518,000 (18,500*$28)
Contribution margin	$222,000
Less : Fixed expenses	$147,600
Net income	$74,400

4.

Margin of safety in dollars = Sales - Breakeven sales

= $616,000 - $492,000

= $124,000

Margin of safety percentage = Margin of safety / Sales

= $124,000 / $616,000

= 20.13%

5.

Contribution margin ratio = Contribution margin / Sales

= $12 / $40

= 0.3

Increase in monthly net operating income = Increase in sales * Contribution margin ratio

= $53,000 * 0.3

= $15,900