Question

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

	Total			Per Unit
Sales	$	310,000		$	20
Variable expenses		217,000			14
Contribution margin		93,000		$	6
Fixed expenses		72,600
Net operating income	$	20,400

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 $37,800?

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 the company can sell more units thereby increasing sales by $57,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

ANSWER1

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

=$72,600/$6

=12,100

Break even point in dollar sales = Break even in units * Selling price

=12,100*$20

=$242,000

ANSWER 2

On break even point, company's contribution margin is equal to its fixed cost because on the break even level of sales the operating income of company becomes zero and operating income is the difference between contribution margin and fixed cost.

Contribution margin = $72,600

ANSWER 3

Unit sales for target profit   =   (Fixed expense + Target profit) / Contribution margin per unit

($72,600 + $37,800) / $6

$110,400 / $6

18,400 units

	Total	Per unit
Sales (18,400 *$20)	$368,000	$20.00
Variable expenses (18,400 * $14)	($257,600)	($14.00)
Contribution margin	$110,400	$6.00
Fixed expenses	($72,600)
Net operating income (Target Profit)	$37,800

ANSWER 4

Margin of safety in dollars = Actual sales in dollars - Break even sales in dollars

$310,000 - $242,000

=$68,000

Margin of safety percentage = Margin of safety / Sales * 100

$68,000 / $310,000 * 100

=20.94%

ANSWER 5

Contribution margin ratio = Contribution margin per unit / Selling price per unit * 100

$6 / $20 * 100

30%

Increase in contribution margin =   Increases in sales * Contribution margin ratio

$57,000 * 30%

$27,100

hope you got the answer, please comment for any clarification

Thankyou and all the best for future

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