Question

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

	total	per unit
sales	$306,000	$20
variable expenses	$214,200	$14
contribution margin	$91,800	$6
fixed expenses	$74,400

net operating income $17,400

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 $33,600? Use the formula method.

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

4. Refer to 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).

5. What is the company’s CM ratio? If monthly sales increase by $83,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Net operating income increases by _____ %

Answer 1

1)
	Break even point		12,400 units
	Break even point		$ 2,48,000
	Working:
	Break even point in units			=	Fixed Cost/Contribution Margin per unit
				=	$           74,400	/	$       6.00
				=	12,400
	Contribution Margin Ratio			=	Contribution Margin/Sales
				=	$               6.00	/	$     20.00
				=	30%
	Break even point in dollar sales			=	Fixed Cost/Contribution Margin Ratio
				=	$           74,400	/	30%
				=	$       2,48,000
2)
	Contribution Margin		$     74,400
	At break even, contribution margin is equal to fixed cost because there is no profit at break even level.
3-a)
	Required Units		18,000 units
	Working;
	Fixed cost				$           74,400
	Target Profit				$           33,600
	Target Contribution Margin				$       1,08,000
	/Contribution Margin per unit				$               6.00
	Target units to be sold				18,000
3-b)
				Per Unit	Total
	Sales			$          20	$       3,60,000
	Variable cost			$          14	$       2,52,000
	Contribution Margin			$             6	$       1,08,000
	Fixed Cost				$           74,400
	Net Operating Income				$           33,600
4)
	Margin of Safety($)				$           58,000
	Margin of Safety(%)				18.95%
	Working:
	Margin of safety is the level in excess of Break even level.
	Total Sales				$       3,06,000
	Break even Sales				$       2,48,000
	Margin of safety sales				$           58,000
	Margin of safety sales(%)			=	Margin of safety sales		/	Total Sales
				=	$           58,000		/	$ 3,06,000
				=	18.95%