Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow: Total Per Unit Sales $ 316,000 $ 20 Variable expenses 221,200 14 Contribution margin 94,800 $ 6 Fixed expenses 76,200 Net operating income $ 18,600 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 attain a target profit of $36,000? 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 $100,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Selling Price per unit = $20
Variable Cost per unit = $14
Contribution Margin per unit = $6
Fixed Expenses = $76,200

Answer 1.

Breakeven Point in unit sales = Fixed Costs / Contribution Margin per unit
Breakeven Point in unit sales = $76,200 / $6
Breakeven Point in unit sales = 12,700

Breakeven Point in dollar sales = Breakeven Point in unit sales * Selling Price per unit
Breakeven Point in dollar sales = 12,700 * 20
Breakeven Point in dollar sales = $254,000

Answer 2.

Contribution Margin at breakeven point is equal to total fixed cost.
Contribution Margin at breakeven point is $76,200

Answer 3-a.

Required Unit Sales = (Fixed Costs + Target Profit) / Contribution Margin per unit
Required Unit Sales = ($76,200 + $36,000) / $6
Required Unit Sales = 18,700

Answer 3-b.

Answer 4.

Margin of Safety in dollar = Sales - Breakeven Point in dollar sales
Margin of Safety in dollar = $316,000 - $254,000
Margin of Safety in dollar = $62,000

Margin of Safety in percentage = Margin of Safety in dollar / Sales
Margin of Safety in percentage = $62,000 / $316,000
Margin of Safety in percentage = 19.62%

Answer 5.

Contribution Margin Ratio = Contribution Margin per unit / Selling Price per unit
Contribution Margin Ratio = $6 / $20
Contribution Margin Ratio = 30%

Increase in Net Operating Income = Contribution Margin Ratio * Increase in Sales
Increase in Net Operating Income = 30% * $100,000
Increase in Net Operating Income = $30,000