Question

Exercise 5-18 Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio [LO5-1, LO5-3, LO5-5, LO5-6, LO5-7]

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		145,200
Net operating income	$	44,400

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 $70,800? 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 $80,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

        

Answer 1

	Particulars	Total	Per Unit
	Sales	$632,000	40
	Less:  Variable expenses	$442,400	28
	Contribution margin	$189,600	12
	Fixed expenses	$145,200
	Net operating income	$44,400
1	What is the monthly break-even point in unit sales and in dollar sales?
	Break even = (Fixed cost/contribution per unit)*sale price per unit
	Break even = (145,200/12)*40
Ans	Break even in dollers= $484,000 Break even in units (145,200/12) = 12,100 units
2	Without resorting to computations, what is the total contribution margin at the break-even point?
	Contribution margin at break even point = fixed cost (or) break even units*Contribution margin per unit
	Contribution margin at break even point = $145,200 (or) ($12*12,100)
Ans	Contribution margin at break even point = $145,200
3-a	How many units would have to be sold each month to earn a target profit of $70,800? Use the formula method.
	sales to earn desired profit = (Fixed cost+Desired profit)/contribution per unit
	sales to earn desired profit = (145,200+70,800)/12 = 18,000 units
3-b	Verify your answer by preparing a contribution format income statement at the target sales level.	Amount
	Sales 18,000 units*$40	$720,000
	Less: Variable cost @ $28	$504,000
	Contribution margin	$216,000
	Less: Fixed cost	$145,200
	Operating profit	$70,800
4	Compute the company's margin of safety in both dollar and percentage terms.
	Margin of safety = Profit/P.V Ratio
	P.v ratio = contribution/sales*100 = 12/40*100 =30%
	Margin of safety = $44,400/30% = $148,000
	Margin of safety = $148,000
	Margin of safety %= $148,000/632,000 *100 = 23.42%
5	What is the company’s CM ratio? If monthly sales increase by $80,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
	Company’s CM ratio =12/40*100 = 30%
	Revenue if monthly sales increased by 80,000	$712,000
	CM = sales*CM ratio	$213,600
	Less: Fixed cost	$145,200
	Net operating income	$68,400
	Increase in operating income	$24,000