Question

In: Accounting

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

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?

Solutions

Expert Solution

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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