Question

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

	Total			Per Unit
Sales	$	450,000		$	30
Variable expenses		180,000			12
Contribution margin		270,000		$	18
Fixed expenses		216,000
Net operating income	$	54,000

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 earn a target profit of $90,000? 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.

         

5.	What is the company’s CM ratio? If monthly sales increase by $50,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

        

Answer 1

Answer 1.

Selling Price per unit = $30
Contribution Margin per unit = $18
Fixed Expenses = $216,000

Breakeven Point in unit sales = Fixed Expenses / Contribution Margin per unit
Breakeven Point in unit sales = $216,000 / $18
Breakeven Point in unit sales = 12,000

Breakeven Point in dollar sales = Breakeven Point in unit sales * Selling Price per unit
Breakeven Point in dollar sales = 12,000 * $30
Breakeven Point in dollar sales = $360,000

Answer 2.

At breakeven point:

Total Contribution Margin = Fixed Expenses
Total Contribution Margin = $216,000

Answer 3-a.

Target Profit = $90,000

Required Sales in unit = (Fixed Expenses + Target Profit) / Contribution Margin per unit
Required Sales in unit = ($216,000 + $90,000) / $18
Required Sales in unit = 17,000

Answer 3-b.

Answer 4.

Margin of Safety in dollars = Sales - Breakeven Point in dollar sales
Margin of Safety in dollars = $450,000 - $360,000
Margin of Safety in dollars = $90,000

Margin of Safety in percentage = Margin of Safety in dollars / Sales
Margin of Safety in percentage = $90,000 / $450,000
Margin of Safety in percentage = 20%

Answer 5.

CM Ratio = Contribution Margin per unit / Selling Price per unit
CM Ratio = $18 / $30
CM Ratio = 0.60

Increase in Sales = $50,000

Increase in Net Operating Income = CM Ratio * Increase in Sales
Increase in Net Operating Income = 0.60 * $50,000
Increase in Net Operating Income = $30,000