Question

11. acct

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

	Total			Per Unit
Sales	$	616,000		$	40
Variable expenses		431,200			28
Contribution margin		184,800		$	12
Fixed expenses		154,800
Net operating income	$	30,000

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 attain a target profit of $55,200?

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 $97,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Question - 1.

>> Break-Even units = Fixed cost / CM per unit

>> Break-Even units = $ 154,800 / $ 12

>> Break-Even units = 12,900

>> Break Even sales = 12,900 * $ 40

>> Break Even sales = $ 516,000.

Question - 2.

>> Total contribution margin at break-even point = $ 154,800.

>> At break-even point contribution margin and fixed cost are equal.

Question - 3 (a )

>> Target sales units = ( Fixed cost + Desired profit ) / CM per unit

>> Target sales units = ( $ 154,800 + $ 55,200 ) / $ 12

>> Target sales units = 17,500.

Question - 3 (b)

Income Statement At target sales level ( 17,500 )

Particulars	Amount
Sales ( 17,500 * $ 40 )	$ 700,000
Less : Variable cost ( 17,500 * $ 28 )	$ ( 490,000 )
Contribution Margin	$ 210,000
Less : Fixed Cost	$ ( 154,800 )
Net income	$ 55,200

Question - 4.

>> Margin of Safety = Actual Sales - Break even sales

>> Margin of Safety = $ 616,000 - $ 516,000

>> Margin of Safety = $ 100,000.

>> Margin of safety % = Margin of salefy / Actual sale

>> Margin of safety % = ( $ 100,000 * 100 ) / $ 616,000

>> Margin of safety % = 16.234 %.

Question - 5.

>> CM ratio = ( $ 12 * 100 ) / $ 40

>> CM ratio = 30 %.

>> Net Operating Income increased by = $ 97,000 * 30 %

>> Net Operating Income increased by = $ 29,100.