Question

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

	Total			Per Unit
Sales	$	636,000		$	40
Variable expenses		445,200			28
Contribution margin		190,800		$	12
Fixed expenses		154,800
Net operating income	$	36,000

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 $57,600?

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 $68,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Menlo Company

1. Break even point = Fixed cost / contribution per unit

= $ 154,800 / $ 12 = 12,900 units

= Fixed cost / PV ratio

= $ 154,800 / 0.30 = $ 516,000

PV ratio = Contribution /Sales = 12/40 = 0.30

Variable cost ratio = 1-PV ratio = 1-0.30 = 0.70

2. Contribution margin = Break even sales × PV ratio

= $ 516,000 × 0.30 = $ 154,800

(The contribution at Break even sales would be equals to the fixed cost)

3a. Sales units = (Fixed cost + Targeted profit)/contribution per unit

= (154,800+57,600)/12

= $ 212,400/12 = 17,700 units

3b, Contribution income statement

	Calculations	$
Slaes	17,700 units × $ 40	708,000
Less: Variable cost	17,700 units × $ 28	(495,600)
Contribution margin	17,700 units × $ 12	212,400
Less: Fixed cost		(154,800)
Net operating income		$ 57,600

4. Margin of safety ($)= total sales - break even sales

= 636,000 - 516,000 = $ 120,000

Margin of safety (%) = (total sales - break even sales)/total sales

= $ 120,000/ $ 636,000 = 18.87%

5. Contribution margin ratio = (sales × (1-variable cost ratio))/sales

= (636,000+68,000)×(1-0.70)/(704,000)

= (704,000×0.30)/704,000 = 0.30 (30%)

Net operating income = sales × CM ratio - fixed cost

= 704,000 × 0.30 - 154,800

= $ 56,400

Net operating income increased by $ 20,400 (56,400-36,000)