Question

Company ABC 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
Fixed 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 earn a target profit of $90,000? Use the formula method. 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 $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). Break even units point = Fixed expenses / Contribution margin per unit

= 216000 / 18 = 12000 units

Contribution margin ratio = Contribution margine / Revenue per unit = 18/30 = 60%

Break even point in dollars = fixed expenses / contribution margin ratio = 216000 /60% = 360000

(2). The contribution margin at the break even points is $216000 it is because the point must equal to the fixed expenses.

(3).(a)

Unit sold to attain target profit = (Target profit + fixed expenses) / Unit contribution margin

= (90,000 + 216000)/$18 per unit = 17,000 units

(3) (b).

Sales (17,000 units x 30 per unit) = 510,000 30

Varialble expenses (17,000 units x 12 per unit) 204,000 12

Contribution margin (17,000 units x 18 per unit) 306,000 18

Fixed expenses 216,000

Net operating income 90,000

(4). Margin of safety in dollars = Total sales - Break even sales = 450,000 - 360,000 = 90,000

Margin of safety % = Margin of safety in dollar / Total sales = 90000 / 450,000 = 20%

(5).

CM Ratio = Contributiion margin per unit price / Sales per unit price

CM Ratio = $18 / $30 = 60%

We would expect net income to rise by $50,000 * 60% = $30,000

Net operating income (NOI) increases by $30,000

The comapny's fixed expenses wil not change and the monthly net operating income will increase by the increase contribution amount margin of 30,000

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