Question

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

	Total			Per Unit
Sales	$	632,000		$	40
Variable expenses		442,400			28
Contribution margin		189,600		$	12
Fixed expenses		150,000
Net operating income	$	39,600

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 $69,600? 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 $100,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

        

Answer 1

• All working forms part of the answer
• Requirement 1

A	Total Fixed expenses	$                                     1,50,000.00
B	Unit Contribution margin	$                                                 12.00
C=A/B	Break Even point in Units	12500
D = C x $40	Break Even in Dollar Sales	$                                     5,00,000.00

• Requirement 2

Total Contribution margin at Break Even point = Total Fixed expenses = $ 150,000

• Requirement 3 (a)

A	Target profits	$                                         69,600.00
B	Total Fixed expenses	$                                     1,50,000.00
C=A+B	Total Contribution margin required to be earned	$                                     2,19,600.00
D	Unit Contribution margin	$                                                 12.00
E=C/D	No. of unit s to be sold for earning desired profits	18300

• Requirement 3(b)

	Unit	per unit	Amount
Sales	18300	$                             40.00	$        7,32,000.00
Variable expenses	18300	$                             28.00	$        5,12,400.00
Contribution margin	18300	$                             12.00	$        2,19,600.00
Fixed expenses			$        1,50,000.00
Net Operating Income (or Desired Profit)			$           69,600.00

• Requirement 4

A	Break Even in Dollar Sales [calculated in Req 1]	$                                     5,00,000.00
B	Total Sales	$                                     6,32,000.00
C= B - A	Margin of Safety Sales	$                                     1,32,000.00
D = (C/B)x100	Margin of Safety %	20.89%

• Requirement 5

A	Unit Contribution margin	$                                                 12.00
B	Unit Sales price	$                                                 40.00
C=A/B	CM Ratio	30%
D	Sales Increase by	$                                     1,00,000.00
E=D x C	Net Operating income will increase by	$                                         30,000.00