Question

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

	Total			Per Unit
Sales	$	608,000		$	40
Variable expenses		425,600			28
Contribution margin		182,400		$	12
Fixed expenses		152,400
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 earn a target profit of $66,000? 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. 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 $96,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

        

Answer 1

Answer 1

Break even point in units = Fixed Costs / Contribution per unit = $152,400 / $12 = 12,700 units

Break even point in dollors = Break even point in units * selling price per unit = 12,700 units * $40 = $508,000

Answer 2

Total contribution margin at the break-even point = Total Fixed cost = $152,400

Answer 3a

Target profit = $66,000

Target Contribution = Target profit + Fixed costs = $66,000 + $152,400 = $218,400

Units to be sold to achieve target profit = Target Contribution / Contribution margin per unit

= $218,400 / $12 = 18,200 units

Answer 3b

Income Statement

Particulars	Amount ($)
Sales (18,200 * 40)	728,000
Less : Variable costs (18,200 * 28)	509,600
Contribution	218,400
Less Fixed Costs	152,400
Net profit	$66,000

Answer 4

Margin of safety in dollar = Actual Sales - Break even sales = $608,000 - $508,000 = $100,000

Margin of safety percentage = Margin of safety in dollar / Actual Sales = $100,000 / $608,000 = 16.45 %

Answer 5

Company’s CM ratio = Contribution margin per unit / Sales per unit = $12 / $40 = 30 %

Increase in Sales = $96,000

Increase in contribution = $96,000* 30 % = $28,800

Increase in net operating income = Increase in contribution = $28,800