Question

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

	Total			Per Unit
Sales	$	308,000		$	20
Variable expenses		215,600			14
Contribution margin		92,400		$	6
Fixed expenses		78,000
Net operating income	$	14,400

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 $33,000?

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 $58,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Answer)

1) BEP (in units) = FIXED COSTS / Contribution per unit

= 78,000 / 6

= 13,000 units

  BEP (in Value) = BEP units * sales price per unit

= 13,000 * 20

= 2,60,000

2) Total contribution margin at BEP will be equal to fixed costs that is $ 78,000.

3) a) Units sold for desired profit = (Fixed Costs + Desired Profit) /  Contribution Margin

= (78,000 + 30,000) / 6

= 18,0000

  

3) b) Income Statement

Particulars	Amount
Sales (18,000 * 20)	360,000
Less- Variable Costs (18,000 * 14)	(252,000)
Contribution Margin	108,000
Less- Fixed Costs	(78,000)
Profit	30,000

4) Margin of Safety (Value) = Sales - BEP

= 308,000 -260,000

= $ 48,000

Margin of Safety (%) = (Sales - BEP) / Sales

= (308,000 - 260,000) / 308,000

= 48,000 / 308,000

= 15.58%

5) Contribution Margin Ratio

Contribution Margin Ratio = Contribution Margin / sales price *100

= 6 / 20 *100

= 30%

Net Operative Income if sales increased by $ 58,000

New sales = 308,000 + 58,000

= 366,000

Contribution Margin = Sales * Contribution margin ratio

= 366,000 * 30%

= $ 109,800

Net Operative Income = Contribution Margin - Contribution Margin

= 109,800 -78,000

= 21,800

Increase in Net Operative Income = 21,800- 14,400

= $ 7,400