Question

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

                                                                                Total                 Per Unit

Sales                                                             $450,000                  $30        

Variable Expenses                                         180,000                   12

Contribution Margin                                      270,000                  $18

Field Expenses                                                 216,000

Net Operating Income                                    $54,000

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.       How many units would have to be sold each month to attain a target profit of $90,000? Verify your answer by preparing a contribution format income statement at the target sales level.

4.       Refer to the original data. Compare the company’s margin of safety in both dollar and percentage terms.

5.       What is the company’s CM ratio? If sales increase by $50,000 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.

Breakeven point (In Units) = Fixed Cost / Contribution Margin per unit

= $216,000 / $18

Breakeven point (In Units) = 12,000 Units

Breakeven point (In value) = Breakeven point (In Units) * Sales price per unit

= 12,000 units * $30

Breakeven point (In value) = $360,000

2.

Contribution margin is the point where the profit is Zero. So,

Contribution margin at Breakeven point = Fixed Cost

Contribution margin at Breakeven point = $216,000

3.

Let units sold to achieve $90,000 profit = x

Profit = Sales – Variable cost – Fixed Cost

90,000 = 30x – 12x – 216,000

(90,000 + 216,000) / 18 = x

X= 17,000 Units

Units sold to achieve $90,000 profit = 17,000 Units

Units	17,000
Sales (17,000 * $30)	510,000
Variable Cost (17,000 * $12)	204,000
Contribution Margin	306,000
Fixed Cost	216,000
Net Operating Income	90,000

4.

Margin of Safety (In Value) = Actual Sales – Breakeven point (In Value)

= 450,000 – 360,000

Margin of Safety (In Value) = $90,000

Margin of Safety ratio = [Margin of safety (In Value) / Actual Sales] * 100

= [90,000 / 360,000] * 100

Margin of Safety ratio = 25%

5.

CM Ratio = (Contribution Margin / Total Sales) * 100

= (270,000 / 450,000) * 100

CM Ratio = 60%

If the sales increases by $50,000, then there will be only increase in Variable Cost as Fixed cost does not change with change in production or sales, as Fixed Cost is Fixed in nature. So

Profit = Sales – Variable Cost

Profit = Contribution Margin

Increase in Profit = Sales * CM Ratio

= $50,000 * 60%

Increase in Profit = $30,000