Question

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

	Total			Per Unit
Sales	$	600,000		$	40
Variable expenses		420,000			28
Contribution margin		180,000		$	12
Fixed expenses		153,600
Net operating income	$	26,400

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 $56,400?

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

Req 1	Break even(units) = total fixed cost/contribution margin per unit
			153600/12
			12800	units
	Break even(sales) =		12800*40
			512000
	Break even point in unit sales			12,800	units
	Break even point in dollar sales			512000
Req 2	total contribution margin			153,600
Req 3
3a)	units to be sold =(total fixed cost+target profit)/contribution margin per unit
			(153600+56400)/12
			17500	units
	unit sales needed to attain target profit				17,500	units
3b)		Contribution income statement
				total	per unit
	Sales			700000	40
	variable expenses			490000	28
	contribution margin			210000	12
	fixed expenses			210,000
	net operating income			0
4)	Margin of safety = actual sales - BEP sales
			600,000-512000
			88000
	Margin of safety(%) = margin of safety/actual sales
			88000/600000
			14.67%
			Dollars	percentage
	Margin of safety		88000	14.67%
5)	CM ratio = 12/40
		30.00%
	net operating income will increase by 60000*30%
				18000
	CM ratio				30%
	net operating income increases by				18,000