Question

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

	Total			Per Unit
Sales	$	312,000		$	20
Variable expenses		218,400			14
Contribution margin		93,600		$	6
Fixed expenses		78,000
Net operating income	$	15,600

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 $25,800?

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 $60,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Answer 1.

Selling Price per unit = $20
Contribution Margin per unit = $6
Fixed Expenses = $78,000

Breakeven Point in unit sales = Fixed Expenses / Contribution Margin per unit
Breakeven Point in unit sales = $78,000 / $6
Breakeven Point in unit sales = 13,000

Breakeven Point in dollar sales = Breakeven Point in unit sales * Selling Price per unit
Breakeven Point in dollar sales = 13,000 * $20
Breakeven Point in dollar sales = $260,000

Answer 2.

At breakeven point:

Total Contribution Margin = Fixed Expenses
Total Contribution Margin = $78,000

Answer 3-a.

Contribution Margin per unit = $6
Fixed Expenses = $78,000
Target Profit = $25,800

Required unit sales = (Fixed Expenses + Target Profit) / Contribution Margin per unit
Required unit sales = ($78,000 + $25,800) / $6
Required unit sales = 17,300

Answer 3-b.

Answer 4.

Sales = $312,000
Selling Price per unit = $20

Unit Sales = Sales / Selling Price per unit
Unit Sales = $312,000 / $20
Unit Sales = 15,600

Margin of Safety in dollar = Actual Sales - Breakeven Point in dollar sales
Margin of Safety in dollar = $312,000 - $260,000
Margin of Safety in dollar = $52,000

Margin of Safety in percentage = Margin of Safety in dollar / Actual Sales
Margin of Safety in percentage = $52,000 / $312,000
Margin of Safety in percentage = 16.67%

Answer 5.

CM Ratio = Contribution Margin / Sales
CM Ratio = $93,600 / $312,000
CM Ratio = 30%

Increase in sales = $60,000

Increase in Net Operating Income = CM Ratio * Increase in sales
Increase in Net Operating Income = 30% * $60,000
Increase in Net Operating Income = $18,000