Question

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

	Total			Per Unit
Sales	$	604,000		$	40
Variable expenses		422,800			28
Contribution margin		181,200		$	12
Fixed expenses		152,400
Net operating income	$	28,800

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 $70,800?

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 $91,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

1. Contribution margin ratio = Contribution margin per unit / Selling price per unit

= $12 / 440

= 0.3

Break-even point in unit sales = Fixed expenses / Contribution margin per unit

= $152,400 / $12

= 12,700

Break-even point in dollar sales = Fixed expenses / Contribution margin ratio

= $152,400 / 0.3

= $508,000

2. Total contribution margin at break-even = Fixed expenses

= $152,400

3-a. Units to be sold = (Fixed expenses + Target profit) / Contribution margin per unit

= ($152,400 + $70,800) / $12

= $18,600

3-b.

	Total	Per unit
Sales (18,600 units)	$744,000	$40
Variable expenses	$520,800	$28
Contribution margin	$223,200	$12
Fixed expenses	$152,400
Net operating income	$70,800

4.

Margin of safety = Sales - Break-even sales

= $604,000 - $508,000

= $96,000

Margin of safety percentage = Margin of safety / Sales * 100

= $96,000 / $604,000 * 100

= 15.89%

5. Contribution margin ratio = Contribution margin per unit / Selling price per unit

= $12 / 440

= 0.3

Increase in net operating income = $91,000 * 0.3

= $27,300