Question

Menlo Company distributes a single product. The company's sales and expenses for last month follow: Per Unit $40 Sales Variable expenses Contribution margin Fixed expenses Net operating income Total $ 620,000 434,800 186,00 153,600 $ 32,480 $ 12 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 $57,600? 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 $91,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

U units Break-even point in unit sales 12,800 Break - even point in dollar $ 512,000 Sales Calculation: Profit = Unit CM X Q - Fixed expenses. $0 = ($40 - $28) x Q - $ 153,600 $0 = ($12) x Q - $ 153,600 $ 120 = $153,600 Q = $ 153,600 = $12 per unit a = 12,800 units or At 4o per unit 12, 800 X $40 per unit = $512,000 $ 153,600 Total contribution margin The contribution margin is $153,600 because the Contribution margin is equal to fixed expenses at the break-even point. (3) 117,600 to attain target profit Units sales needed Calculation? Unit sold to attain target profit = (Target profit & fixed expenses) Unit contribution margin = ($57,600+ $153,600 +2 per unit = $ 211, 200 = $12 17,600 units

3(6) Menlo Company Contubulion income statement Total unit Sales $704,000 $40. Variable expenses $ 492,800 $ 28 Contribution margin $ 211,200 $12 Fixed expenses $ 153,600 Net operating income 57,600 Calculation: Sales = 17,600 units X $40 per unit = $ 704,000 Variable expenses = 17,600 units X $28 per unit $ 492,800 Percentage Dollars Margin of safety $108,000 17.42 % Calculation: Margin of safety in dollars = Total sales - Break even sales = $620,000 - $ 512,000 = $ 108,000 Margin of safety in percentage = margin of safety in dallars Total sales $ 108,000 & 620,000 = 17.42"/

(5) CM ratio 30 %. Net operating income increases $ 27,300 calculation CM ratio = ($40- $28) = $40] = 30% Total sales & sales increase by & 91,000 = $620 =$620,000 + $91,000 = $ 711,000 Expected total contribution margin = ($711,000 X 30%. $213,300 Present total contribution margin = ($620,000 X 30%) & 186,000 Increased contribution margin & 27, 300