Question

Menlo Company distributes a single product. The company's sales and expenses for last month follow: Per Unit Total Sales Variable expenses 308,000 20 215,600 14 Contribution margin 6 92,400 Fixed expenses 75,000 17,400 Net operating income 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 $38,400? 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 $77,000 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 costs/Contribution Margin per unit

= 75,000/6

= 12,500 units

In Dollar Sales = Fixed costs/Contribution Margin Ratio

Contribution Margin Ratio = Contribution Margin/Sales

= 6/20 = 30%

Hence, break even sales = 75,000/30%

= $250,000

2.Total contribution margin at break even point = fixed costs

= $75,000

3-a. Target Profit = $38,400

Add: Fixed costs = $75,000

Desired Contribution Margin = $113,400

Units required to be sold = 113,400/6

= 18,900 units

3-b. Contribution Format Income Statement

	Total	Per Unit
Sales	378,000	20
Variable Expenses	264,600	14
Contribution Margin	113,400	6
Fixed Expenses	75,000
Net Operating Income	38,400

4.Margin of Safety in dollars = Sales – Break even sales

= 308,000-250,000

= $58,000

In % = 58,000/308,000

= 18.83%

5.CM Ratio = 6/20

= 30%

Monthly net operating income will increase by the amount of increase in contribution margin

= 77,000*30%

= $23,100