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In: Accounting

Chapter 6 Question 6: Menlo Company distributes a single product. The company’s sales and expenses for...

Chapter 6 Question 6:

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

Total Per Unit
Sales $ 628,000 $ 40
Variable expenses 439,600 28
Contribution margin 188,400 $ 12
Fixed expenses 153,600
Net operating income $ 34,800


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 $54,000?

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 $95,000 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

1. Break-even point in unit sales = Fixed expenses / Contribution margin per unit

= $153,600 / $12

= 12,800

Break-even point in dollar sales = 12,800 units * $40 per unit

= $512,000

2. Total contribution margin at break-even = Fixed expenses = $153,600

3-a. Units to be sold = (Fixed expenses + Target profit) / Contribution margin per unit

= ($153,600 + $54,000) / $12

= 17,300

3-b. Contribution format income statement

Total Per unit
Sales $692,000 $40
Varaible expenses $484,400 $28
Contribution margin $207,600 $12
Fixed expenses $153,600
Net operating income $54,000

4. Margin of safety in dollars = Sales - Break even sales

= $628,000 - $512,000

= $116,000

Margin of safety percentage = Margin of safety / Sales

= $116,000 / $628,000

= 18.47%

5. Contribution margin ratio = Contribution margin / Sales

= $12 / $40

= 0.3

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

= $95,000 * 0.3

= $28,500


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