Question

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

	Total			Per Unit
Sales	$	608,000		$	40
Variable expenses		425,600			28
Contribution margin		182,400		$	12
Fixed expenses		145,200
Net operating income	$	37,200

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 earn a target profit of $66,000? Use the formula method.

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. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

5. What is the company’s CM ratio? If monthly sales increase by $99,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

Contribution margin ratio = Contribution margin per unit / Sales per unit

= $12 / $40

= 30%

1.

Breakeven point in units = Fixed cost / Contribution margin per unit

= $145,200 / $12

= 12,100 units

Breakeven point in sales = Fixed cost / Contribution margin ratio

= $145,200 / 30%

= $484,000

2.

At breakeven point there is no profit or loss. Sales will be equal to total of variable cost and fixed cost.

At breakeven contribution margin will be equal to fixed cost.

Contribution margin = $145,200

3-a.

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

= ($145,200 + $66,000) / $12

= 17,600 units

3-b.

Sales (17,600 X $40)	$704,000
(Less): Variable cost (17,600 X $28)	$492,800
Contribution margin	$211,200
(Less): Fixed cost	$145,200
Net operating income	$66,000

4.

Margin of safety in dollars = Sales - Breakeven sales

= $608,000 - $484,000 (Breakeven sales calculated in 1.)

= $124,000

Margin of safety in percentage = (Sales - Breakeven sales) / Sales

= ($608,000 - $484,000) / $608,000

= 20.39%

5.

Contribution margin ratio = 30%

Contribution margin = Sales X Contribution margin ratio

= $99,000 X 30%

= $29,700

Net operating income will increase by $29,700