Question

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

	Total			Per Unit
Sales	$	316,000		$	20
Variable expenses		221,200			14
Contribution margin		94,800		$	6
Fixed expenses		76,800
Net operating income	$	18,000

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 $32,400?

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 $61,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Selling price per unit	20
Less: Variable cost per unit	14
Contribution Margin per unit	6
Contribution Margin ratio [(6/20)*100]	30%
1. Calculation of Break even point in units
Particulars	$
Fixed expenses	76800
Contribution Margin per unit	6
Break even point in units (76800/6)	12800
Calculation of Break even point in Dollars
Fixed expenses	76800
Contribution Margin ratio	30%
Break even point in Dollars (76800/30%)	256000
2. Without resorting to computations, what is the total contribution margin at the break-even point?
		At breakeven point, Contribution margin is equal to fixed costs. Therefore, contribution margin is $ 76800.
3-a. How many units would have to be sold each month to attain a target profit of $32,400?
		Target profit	32400
Add: Fixed Costs	76800
Contribution margin	109200
Contribution Margin per unit	6
Number of units to be sold. (109200/6)	18200
3-b. Verify your answer by preparing a contribution format income statement at the target sales level.
		Sales (18200*20)	364000
Less: Variable Costs (18200*14)	254800
Contribution Margin (364000 - 254800)	109200
Less: Fixed Costs	76800
Target Profit (109200 - 76800)	32400
4. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms.
		Actual sales	316000
Break even point in Dollars (76800/30%)	256000
Margin of safety in dollars (316000-256000)	60000
Margin of safety in dollars (60000/316000)	18.99%
5. What is the company’s CM ratio? If sales increase by $61,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
		Contribution Margin ratio [(6/20)*100]	30%
		Increase in contribution margin (61000*30%)	18300
		Monthly increase in Net operating Income	18300