In: Accounting
Menlo Company distributes a single product. The company’s sales and expenses for last month follow:
Total Per Unit
Sales $ 628,000
$ 40
Variable expenses 439,600
28
Contribution margin 188,400
$ 12
Fixed expenses 153,600
Net operating income $ 34,800
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 $60,000?
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 $72,000 per
month and there is no change in fixed expenses, by how much would
you expect monthly net operating income to increase?
Solution:
1)
Contribution Margin ration = contibution /sales
= $12/$40
=0.30 or 30%
BEP(units) =Fixed cost /contribution per unit
=153,6000/12
= 12,800 units
BEP($) =Fixed cost / Contribution Margin ration
=153,000/0.30
=$ 512,000
2)
Total contribution margin at breakeven is equal to fixed cost = $ 153,600 since at breakeven there is no profit no loss.
3)
a)Units to sell to earn target profit =[Fixed cost+ target income ]/contribution per unit
=(153,600 +60,000)/12
= 213,600/12
= 17,800 units
b)
Sales (17,800 *) | $712,000 |
Less:Variable cost (17,800) | ($498,400) |
Contribution margin | $213,600 |
Less: Fixed cost | ($153,600) |
Net income | $60,000 |
4)
Margin of safety =actual sales -BEP sales
=$628,000 -$512,000
=$116,000
Margin of safety (%)= margin of safety ($) /actual sales
= ($116,000/ $628,000)*100
= $18.47%
5)
Contribution margin ratio = contribution /sales
=12/40
=0.3 or 30%
Net operating income will increase by = increase in sales * CM ratio
=72,000 *0.3
=$21,600
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