Question

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

	Total			Per Unit
Sales	$	302,000		$	20
Variable expenses		211,400			14
Contribution margin		90,600		$	6
Fixed expenses		75,000
Net operating income	$	15,600

What is the monthly break even point in unit sales and in dollar sales?

Break-even point in unit sales units Break-even point in sales dollars

2.	Without resorting to computations, what is the total contribution margin at the break-even point?

	Total contribution margin

3-a.	How many units would have to be sold each month to earn a target profit of $36,000? Use the formula method.

	Units sold

-b. Verify your answer by preparing a contribution format income statement at the target sales level Menlo Company Contribution Income Statement Total Per unit 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).
Dollars Percentage Margin of safety %

5.	What is the company’s CM ratio? If monthly sales increase by $53,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

	CM ratio % Net operating income increases by

Answer 1

1.

Contribution margin ratio = Contribution margin per unit / Selling price per unit

= 6 / 20

= 30%

Breakeven point in unit sales	Fixed costs/Contribution margin per unit	12,500 units (75,000/6)
Breakeven point in sales dollars	Fixed costs/Contribution margin percenatge	250,000 (75,000/30%)

2.

Total contribution margin at breakeven point = Breakeven point in sales dollars * Contribution margin ratio

= 250,000 * 30%

= 75,000

3-a.

Units to be sold to attain target profit = (Fixed costs + Target profit) / Contribution margin per unit

= (75,000 + 36,000) / 6

= 18,500

3-b.

Menlo Company

Contribution Income Statement

	Total	Per unit
Sales	370,000 (18,500*20)	20
Variable costs	259,000 (18,500*14)	14
Contribution margin	111,000	6
Fixed costs	75,000
Operating income	36,000

	Dollars	Percentage
Margin of safety	Sales - Breakeven sales	Margin of safety / sales
	52,000 (302,000 - 250,000)	17.22% (52,000/302,000)

5.

Contribution margin ratio	Contribution margin per unit/Selling price per unit	30% (6/20)
Net operating income increases by	Sales * Contribution margin ratio	15,900 (53,000*30%)