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	72,600
Net operating income	17,400

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 $30,600?

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 $56,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

1. Monthly break-even point in unit sales = Fixed Expenses / Unit Contribution Margin = $ 72,600 / $ 6 = 12,100 units.

Monthly break-even point in dollar sales = Fixed Expenses / Contrbution Margin Ratio = $ 72,600 / ( $ 90,000 / $ 300,000 ) = $ 242,000.

2. Total contribution margin at the break-even point = Fixed Expenses = $ 72,600.

3-a. Monthly unit sales for a taget profit of $ 30,600 = ( Fixed Expenses + Target Profit) / Unit Contribution Margin = $ ( 72,600 + 30,600) / $ 6 = 17,200 units.

3-b.

Sales ( 17,200 x $ 20)	$ 344,000
Variable Expenses	240,800
Contribution Margin	103,200
Fixed Expenses	72,600
Net Operating Income	$ 30,600

4. Margin of safety in dollar terms = Actual Dollar Sales - Break-even Dollar Sales = $ 300,000 - $ 242,000 = $ 58,000.

Margin of safety percentage = $ 58,000 / $ 300,000 * 100 = 19.33 %

5. The company's CM ratio = Contribution Margin / Selling Price = $ 6 / $ 20 = 30 %.

If sales increase by $ 56,000 per month, monthly net operating income will increase by $ 56,000 x 30% = $ 16,800.