Question

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

	Total			Per Unit
Sales	$	612,000		$	40
Variable expenses		428,400			28
Contribution margin		183,600		$	12
Fixed expenses		153,600
Net operating income	$	30,000

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 $66,000?

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 $92,000 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. Monthly break-even point in unit sales and in dollar sales :

Break-even point in units = Fixed cost / (SP - VC)

= $153,600 / ($40 - $28)

= $153,600 / $12

= 12,800 units

Break-even point in dollar sales

= 12,800 units x $40

= $512,000

2. Total contribution margin at the break-even point :

= Break-even point in units x (SP - VC)

= 12,800 units x ($40 - $28)

= 12,800 units x $12

= $153,600

3. a. No. of units that have to be sold each month to attain a target profit of $66,000 :

Profit = Sales - Variable cost - Fixed cost

$66,000 = (SP x Units sold) - (VC x Units sold) - 153,600

$66,000 = ($40 x Units sold) - ($28 x Units sold) - $153,600

$66,000 + $153,600 = $12 x Units sold

$219,600 = $12 x Units sold

Units sold = $219,600 / $12

Units sold = 18,300 units

3. b. Contribution format income statement at the target sales level :

Particulars	Amount
Sales (18,300 units x $40)	$732,000
Less : Variable cost (18,300 units x $28)	$512,400
Contribution margin	$219,600
Less : Fixed cost	$153,600
Net Operating Income	$66,000

4. Margin of safety in both dollar and percentage terms :

Margin of safety

= Current sales - Breakeven sales

= $612,000 - $512,000

= $100,000

Margin of safety in ratio

= (Current sales - Breakeven sales) / Current sales x 100

= ($612,000 - $512,000) / $612,000 x 100

= 16.34%

5. Contribution margin ratio :

Actual Contribution margin ratio

= (SP - VC) / SP x 100

= ($40 - $28) / $40 x 100

= 30$

Now, if

Increase in sales = $92,000

No. of units increase = $92,000 / $40 = 2,300 units

Increase in variable cost = 2,300 units x $28 = $64,400

Net Operating income increase by

= $92,000 - $64,400

= $27,600