Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow: Total Per Unit Sales $ 620,000 $ 40 Variable expenses 434,000 28 Contribution margin 186,000 $ 12 Fixed expenses 151,200 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 earn a target profit of $75,600? Use the formula method.

3-b. Verify your answer by preparing a contribution format income statement at the target sales level.

4. Refer to part 3 and now assume that the tax rate is 30%. How many units would need to be sold each month to an after-tax target profit of $75,600? (Round the final answer to the nearest whole number.)

5. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. (Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).)

6. What is the company’s CM ratio? If monthly sales increase by $65,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Answer:

1. What is the monthly break-even point in unit sales and in dollar sales?

Break-even point in unit sales	12,600	units
Break-even point in dollar sales	504,000

2. Without resorting to computations, what is the total contribution margin at the break-even point?

Total contribution margin

151,200

3-a. How many units would have to be sold each month to earn a target profit of $75,600? Use the formula method.

Unit sold

18,900

3-b. Verify your answer by preparing a contribution format income statement at the target sales level.

Menlo Company
Contribution Income Statement
Sales	756,000	40
Variable expenses	529,200	28
Contribution Margin	226,800	12
Fixed expenses	151,200
Net operating Income	75,600

4. Refer to part 3 and now assume that the tax rate is 30%. How many units would need to be sold each month to an after-tax target profit of $75,600?

Units sales required

21,600

5. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms.

	Dollar	Percentage
Margin of safety	116,000	18.71%

6. What is the company’s CM ratio? If monthly sales increase by $65,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

CM ratio	30%
Net operating Income increases by	19,500

Calculation:

1.

Here we need to calculate the monthly break-even point in unit sales and in dollar sales.

To find the Breakeven point in unit sales, we need to divide the fixed cost with the contribution margin per unit.

Breakeven point in unit sales

= Fixed cost/Contribution margin per unit

= 151,200/12

= 12,600

Then we need to find the break-even point in dollar sales. For that we need to divide the Break-even point in unit sales with the Selling price per unit.

Breakeven point in unit sales

= Break-even point in unit sales /Selling price per unit

= 12,600/40

= 504,000

2.

Here we need to calculate the total contribution margin at the break-even point.

The contribution margin = $151,200

The contribution margin is same as the fixed expenses at the break-even point.

3-a.

Here we need to calculate the number of units would have to be sold each month to earn a target profit of $75,600.

For that we need to add the Target profit with Fixed expense and then divide it with the Contribution margin per unit.

Units sold = ( Target profit + Fixed expenses ) / Contribution margin per unit = ( 75,600 + 151,600 ) / 12 = 18,900 units

3-b.

Here we need to prepare a contribution format income statement at the target sales level.

Sales = 18,900 x 40 = 756,000

Variable expenses = 18,900 x 28 = 529,200

Menlo Company
Contribution Income Statement
Sales (a)	756,000	40
Variable expenses (b)	529,200	28
Contribution Margin (c) = (a)-(b)	226,800	12
Fixed expenses (d)	151,200
Net operating Income (c) - (d)	75,600

4.

Here we need to find the number of units would need to be sold each month to an after-tax target profit of $75,600 and the tax rate is 30%.

For that first we need to find the before tax target profit.

Before tax target profit = After tax target profit / ( 1 - Tax% ) = 75,600 / ( 1 - 30% ) = 108,000

Then we need to find the the number of units would need to be sold each month.

Units sales required = ( Before tax Target profit + Fixed expenses ) / Contribution margin per unit = ( 108,000 + 151,200) / 12 = 21,600 units

5.

Here we need to compute the company's margin of safety in both dollar and percentage terms.

Margin of safety in dollars	=	Total sales − Break even sales
	=	$620,000 − $504,000 = $116,000

Margin of safety percentage	=	Margin of safety in dollars / Total sales
	=	$116,000 / 620,000 = 18.71%

6.

Here first we need to find the CM ratio.

The CM ratio is calculated by deducting the variable expenses from sales and then divide it with sales.

CM ratio = ($40 − $28) ÷ $40 = 30%

Here the monthly sales increase by $65,000 and there is no change in fixed expenses.

So we need to find the monthly net operating income to increase.

Expected total contribution margin: ($685,000 × 30%)	205,500
Present total contribution margin: ($620,000 × 30%)	186,000
Increased contribution margin	19,500