Question

question1 - Lin Corporation has a single product whose selling price is $140 per unit and whose variable expense is $70 per unit. The company’s monthly fixed expense is $32,600.

Required:

1. Calculate the unit sales needed to attain a target profit of $6,250. (Do not round intermediate calculations.)

2. Calculate the dollar sales needed to attain a target profit of $8,000. (Round your intermediate calculations to the nearest whole number.)

Question2- Menlo Company distributes a single product. The company’s sales and expenses for last month follow:

	Total			Per Unit
Sales	$	320,000		$	20
Variable expenses		224,000			14
Contribution margin		96,000		$	6
Fixed expenses		76,200
Net operating income	$	19,800

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 $25,800?

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 $83,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Question 1

Part A

Units Sales Required to earn Target Profit of $ 6,250 = (Target Profit + Fixed Costs) / Contribution Margin per Unit

Target Profit = 6,250

Fixed Costs = $ 32,600

Contribution Margin per Unit = Sales Price per Unit - Variable Costs per Unit

= 140 - 70

= $ 70 per Unit

Units Sales Required to earn Target Profit of $ 6,250 = (6,250 + 32,600) /70

= 38,850 / 70

= 555 Units

Part B

Units Sales Required to earn Target Profit of $ 8,000 = (Target Profit + Fixed Costs) / Contribution Margin per Unit

Target Profit = $ 8,000

Fixed Costs = $ 32,600

Contribution Margin per Unit = Sales Price per Unit - Variable Costs per Unit

= 140 - 70

= $ 70 per Unit

Units Sales Required to earn Target Profit of $ 8,000 = (32,600 + 8,000) / 70

= 40,600 / 70

= 580 Units

Dollar Sales Required to earn Target Profit of $ 8,000 = Units Sales Required to earn Target Profit of $ 8,000 * Sales Price per Unit

= 580 * 140

= $ 81,200

Question 2

Part 1

Break Even Point in Units = Fixed Costs / Contribution Margin per Unit

Fixed Costs = $ 76,200

Contribution Margin per Unit = $ 6

Break Even Point in Units = 76,200 / 6

Break Even Point in Units = 12,700 Units

Break Even Point in Dollars = Fixed Costs / Contribution Margin Ratio

Contribution Margin Ratio = Contribution Margin Per Unit / Sales Price per Unit * 100

= 6 / 20 * 100

= 30%

Break Even Point in Dollars = 76,200 / 30%

Break Even Point in Dollars = $ 254,000

Part 2

Total Contribution Margin at Break Even Point = Break Even Point Unit * Contribution Margin per Unit

Contribution Margin per Unit = $ 6

Break Even Point in Units = 12700

Total Contribution Margin at Break Even Point = 12,700 * 6

= $ 76,200

Part 3

3A

Units Sales Required to earn Target Profit of $ 25,800 = (Target Profit + Fixed Costs) / Contribution Margin per Unit

Target Profit = 25,800

Fixed Costs = $ 76,200

Contribution Margin per Unit = $ 6

Units Required to be sold to earn Target Profit = (25,800 + 76,200) / 6

= 102,000 / 6

= 17,000 Units

Part 3B

Contribution Margin Income Statement

Particulars	Amount
Sales Revenue	340,000
Less: Variable Costs	(238,000)
Contribution Margin	102,000
Less: Fixed Costs	(76,200)
Net Operating Income / (Loss)	25,800

Sales Revenue = 17,000 Units * $ 20 per Unit = $ 340,000

Variable Costs = 17,000 Units * $ 14 per Unit = $ 238,000

Part 4

Margin of Safety in Dollars = Total Sales in Dollars - Break Even Sales in Dollars

Break Even Sales in Dollars = $ 254,000

Total Sales in Dollars = $ 320,000

Margin of Safety Sales in Dollars = 320,000 - 254,000

Margin of Safety Sales in Dollars = $ 66,000

Margin of Safety Sales in % = Total Sales in % - Break Even Sales in %

Margin of Safety Sales in % = 100% - 79.38%

Margin of Safety Sales in % = 20.62%

Break Even Sales in % = Break Even Point in Units / Total Sales in Units * 100

Break Even Sales in % = 12,700 / 16,000 * 100 = 79.38%

Margin of Safety Sales in Units = Total Sales in Units - Break Even Point in Units

Break Even Point in Units = 12,700 Units

Total Sales in Units = 16,000 Units

Margin of Safety Sales in Units = 16,000 - 12,700

Margin of Safety Sales in Units = 3300 Units

Total Sales in Units = Total Sale / Selling Price per Unit

= 320,000 / 20

= 16,000 Units

Part 5

Contribution Margin Ratio = Contribution Margin / Total Sales * 100

Contribution Margin = $ 96,000

Total Sales = $ 320,000

Contribution Margin Ratio = 96,000 / 320,000 * 100

Contribution Margin Ratio = 30%

Increase in Operating Income on Increase in Sales = Increase in Sales * Contribution Margin Ratio

Increase in Sales = $ 83,000

Contribution Margin Ratio = 30%

Increase in Operating Income = 83,000 * 30%

Increase in Operating Income = $ 24,900