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 145,200 Net operating income $ 34,800 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?

Answer 1

Answer:

1.

Break even in units = 12100 units

Break even in dollar sales = $484000

2.

Total contribution margin at break even point is $145200.

Explanation:

1.

Break even point is a point, calculated in either units or in dollar value, which provides a point where there is no profit or no loss and the total sales revenue is equal to the total cost.

Break even in units and in dollars can be calculated as follows,

• Break even in units = Fixed costs / Contribution margin per unit

• Break even in dollars = Fixed costs / Contribution margin ratio

• Where contribution margin = Selling price per unit - variable cost per unit

• Contribution margin ratio = Contribution margin per unit / selling price per unit

Break even in units = 145200 / 12    = 12100 units per month

Break even in dollars = 145200 / (12/40)    = $484000

2.

Total contribution margin at break even point is $145200 because total contribution margin is the difference between the total sales revenue and total variable cost and at the break even point, the total contribution margin is enough to cover total fixed cost. So, it is equal to the total fixed cost.