Question

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

	Total			Per Unit
Sales	$	616,000		$	40
Variable expenses		431,200			28
Contribution margin		184,800		$	12
Fixed expenses		146,400
Net operating income	$	38,400

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 $61,200?

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 $88,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Solution 1
Sales	$           40.00
Variable expense	$           28.00
Contribution	$           12.00
Fixed expense	$      146,400
Monthly break-even point in units	Fixed cost/contribution per unit
Monthly break-even point in units	146400/12
Monthly break-even point in units	12,200
Contribution ratio=	Contribution/Sale
Contribution ratio=	12/40
Contribution ratio=	30.00%
Monthly break-even point in dollars	Fixed cost/contribution ratio
Monthly break-even point in dollars	146400/30%
Monthly break-even point in dollars	$      488,000
Solution 2
Break-even point is the sale point at which total contribution is equal to fixed cost making the entity at no profit no loss position
So total contribution at BEP point=	$ 146,400.00
Solution 3-A
Target profit	$   61,200.00
Fixed cost	$ 146,400.00
Contribution required	$ 207,600.00
Units to be sold	Contribution required/contribution per unit
Units to be sold	207600/12
Units to be sold	17,300
Solution 3-B
Income statement
Units		17300
Sales	$           40.00	$                         692,000
Variable expense	$           28.00	$                         484,400
Contribution	$           12.00	$                         207,600
Fixed expense	$      146,400	$                         146,400
Net income		$                           61,200
Solution 4
BEP sale in dollars	$ 488,000.00	As computed in solution 1
Actual sale	$ 616,000.00
Margin of safety in dollars=	Actual sale - BEP sale
Margin of safety in dollars=	$ 128,000.00
Margin of safety in percentage=	Margin of safety/Actual sale
Margin of safety in percentage=	20.78%
Solution 5
Contribution margin ratio	30.00%	As computed in solution 1
If the sale is increased by $ 88,000 and fixed cost remains same then contribution earned
on this increased sale will be increased in net income
Increase in net income=	Increased sale * contribution margin ratio
Increase in net income=	88000*30%
Increase in net income=	$   26,400.00