Question

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

	Total			Per Unit
Sales	$	632,000		$	40
Variable expenses		442,400			28
Contribution margin		189,600		$	12
Fixed expenses		156,000
Net operating income	$	33,600

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 $56,400?

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 $62,000 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 for 1)

Break even sale :

In units:Fixed costs/contribution margin per unit

=$156000/$12=13000 units

In dollars=break even units×selling price per unit

=13000 unirs×$40=$520000(alternatively formula can be used but this provides easy understanding)

Answer for 2)

Contribution margin at break even sale will be fixed cost i.e $156000 because at break even sales there will be no profit or loss .

Answer for 3a)

Sales to attain targeted profit:

(Fixed costs+targeted profit)/contribution per unit.

=($156000+$56400)/$12

=17700 units

Answer for 3b)

Income statement:

	$
Sales (17700units×$40)	708000
Variable costs (17700units×$28)	495600
Contribution	212400
Fixed expenses	156000
Profit	56400

Answer for 4)

Margin of sales:

In dollars:current level of sales-variable even sales

=$632000-$520000

=$112000

In percentage:margin of safety/current level of sales×100

=$112000/$632000×100=17.72%

Answer for 5)

CM ratio: contribution margin/sales

=$12/$40=0.3

The profit increase:$62000×0.3=$18600 per month as there is no changes in fixed costs.