Question

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

	Total			Per Unit
Sales	$	624,000		$	40
Variable expenses		436,800			28
Contribution margin		187,200		$	12
Fixed expenses		148,800
Net operating income	$	38,400

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 $67,200?

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 $65,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

• Contribution per unit = Selling price per unit – Variable cost per unit

= $40.00 - $28.00

= $12.00 per unit

• Contribution Margin Ratio = (Contribution per unit / Selling Price per unit) x 100

= ($12.00 / $40.00) x 100

= 30%

(1)- Monthly break-even point in unit sales and in dollar sales

Break-Even Point in unit sales

Break-Even Point in unit sales = Fixed Expenses / Contribution per unit

= $148,800 / $12.00 per unit

= 12,400 Units

Break-Even Point in Dollar Sales

Break-Even Point in dollar sales = Fixed Expenses / Contribution Margin Ratio

= $148,800 / 0.30

= $496,000

(2)- Total contribution margin at the break-even point

The total contribution margin at the break-even point would be equal to fixed costs ($148,800)

Total contribution margin at the break-even point = Break-Even units x Contribution margin per unit

= 12,400 units x $12

= $148,800

(3)(a)- Units would have to be sold each month to attain a target profit of $67,200

Units to be sold = (Fixed Expenses + Target Profit) / Contribution margin per unit

= ($148,800 + $67,200) / $12 per unit

= $216,000 / $12 per unit

= 18,000 Units

(3)(b)- Contribution format income statement

Sales [18,000 x $40]	7,20,000
Less: Variable Cost [18,000 x $28]	5,04,000
Contribution Margin	2,16,000
Less: Fixed Cost	1,48,800
Net Operating Income	67,200

(4)- Company's margin of safety in both dollar and percentage terms.

Margin of safety in Dollars

Margin of safety in Dollars = Actual Sales – Break-Even Sales

= $624,000 - $496,000

= $128,000

Margin of safety in Percentage

Margin of safety in Percentage = (Margin of safety in Dollar / Actual Sales) x 100

= ($128,000 / $624,000) x 100

= 20.51%

(5)-Company’s Contribution Margin (CM) Ratio

Contribution Margin Ratio = (Contribution per unit / Selling Price per unit) x 100

= ($12.00 / $40.00) x 100

= 30%