Question

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

	Total			Per Unit
Sales	$	636,000		$	40
Variable expenses		445,200			28
Contribution margin		190,800		$	12
Fixed expenses		147,600
Net operating income	$	43,200

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 $74,400?

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 $65,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

		Sales per unit	$40
		Variable expenses per unit	$28
		Unit Contribution margin	$12	(40-28)
		Fixed expenses	$147,600
	1	Monthly Break even point in unit sales	12,300	(147600/12)
		Monthly Break even point in dollar sales	$        492,000	(12300*$40)
	2	Total Contribution Margin at Break even point
		At Breakeven point Profit=0			\
		Profit=Sales -Variable expense-Fixed Expense
		(Sales-Variable expense)=Fixed expense
		Total Contribution Margin=Fixed expense
		Total Contribution Margin=	$147,600
	3a	Target Profit=$74400
		Unit of Sales required for contribution of $74400	6,200	(74400/12)
		Unit of Sales required for Profit of $74400	18,500	(6200+12300)
	3b	Contribution Format Income Statement:
		Sales	$        740,000	(18500*40)
		Variable expenses	$        518,000	(18500*28)
		Contribution Margin	$        222,000
		Fixed Expenses	$147,600
		Profit	$          74,400
	4	Margin of Safety in dollars	$        144,000	(636000-492000)
		Margin of Safety in percentage	29.27%	(144000/492000)*100
	5	CM (Contribution Margin Ratio)=Contribution Margin/Sales
		CM=12/40=	0.3
		CM in percentage	30%
		If sales Increases by $65000
		Increase in Contribution =0.3*65000	$          19,500
		Increase in net operating Income	$          19,500