Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow: Total Per Unit Sales $ 300,000 $ 20 Variable expenses 210,000 14 Contribution margin 90,000 $ 6 Fixed expenses 75,600 Net operating income $ 14,400 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 attain a target profit of $36,600? 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 $89,000 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 to Part 1.

Break Even Point (In Unit) = Fixed Cost / Contribution Margin per Unit
Break Even Point (In Unit) = 75,600 / 6
Break Even Point (In Unit) = 12,600 Units

Break Even Point (In Dollars) = Fixed Cost / Contribution Margin Ratio
Contribution Margin Ratio = Contribution Margin/ Sales * 100
Contribution Margin Ratio = 6 / 20 * 100
Contribution Margin Ratio = 30%

Break Even Point (In Dollars) = 75,600 / 0.30
Break Even Point (In Dollars) = $252,000

Answer to Part 2.

Contribution Margin at Break Even Point = Break Even Point (In Unit) * Contribution Margin per Unit
Contribution Margin at Break Even Point = 12,600 * $6
Contribution Margin at Break Even Point = $75,600

Answer to Part 3-a.

Profit = Sales – Variable Cost – Fixed Cost

Let the Number of Units to be sold be “X” Units
$36,600 = ($20 * X) – ($14 * X) - $75,600
$36,600 = $20X - $14X - $75,600
$36,600 = $6X - $75,600
$6X = $112,200
X = 18,700 Units

To earn a profit of $36,600, total 18,700 units to be sold.

Answer to Part 3-b.

Answer to Part 4.

Margin of Safety (in Dollars) = Current Sales – Break Even Sales
Margin of Safety (in Dollars) = $300,000 - $252,000
Margin of Safety (in Dollars) = $48,000

Margin of Safety (in percentage) = (Current Sales – Break Even Sales)/ Current Sales * 100
Margin of Safety (in percentage) = (300,000 – 252,000) / 300,000 * 100
Margin of Safety (in percentage) = 48,000 / 300,000 * 100
Margin of Safety (in percentage) = 16%