Answer:
Part 1. What is the monthly break-even point in unit sales and in dollar sales?
Break-even point in sales =$484000
Break-even point in unit = 12084 units
Part 2. What is the total contribution margin at the break-even point?
Total contribution margin = $ 145,200
Part 3 (a) How many units would have to be sold each month to attain a target profit of $63,600?
Units to be Sold =17400 units
Part 3 (b) Verify your answer by preparing a contribution format income statement at the target sales level.
Income statement at the target sales level of 17400 units
Sales ($40×17400) 696000
Less Variable Costs ($28×17400) 487200
Contribution 208800
Less Fixed Cost 145,200
Target Profit 63,600
Part 4 Compute the company's margin of safety in both dollar and percentage terms
Margin of Safety (Dollars) = $ 212000
Margin of Safety (Units) = 5 400
Part 5. What is the company’s CM ratio? If sales increase by $80,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
(A) Contribution Margin Ratio is $12/$40×100 = 30%.
(B) If sales increase by $80,000, then net operating income to increase by $80000
Explanation:
Part 1. What is the monthly break-even point in unit sales and in dollar sales?
Break-even point in unit sales = Fixed Costs/Contribution Margin Ratio
=Fixed expenses $145,200/Contribution Margin Ratio 0.30
=$484000
Break-even point in unit = Fixed Costs/Contribution per unit
=Fixed expenses $145,200/Contribution per unit $12
=12084
Part 2. What is the total contribution margin at the break-even point?
Total contribution margin = $ 145,200
Part 3 (a) How many units would have to be sold each month to attain a target profit of $63,600?
Units to be Sold = (Target Profit + Fixed Cost)/ Contribution per unit
=( $63,600+$145,200)/$12
=17400 units
Part 4 Compute the company's margin of safety in both dollar and percentage terms
Margin of Safety = (Expected Sales - Break Even Sales)/Expected Sales ×100
= 696000-484000/ 696000
= 30.46% (2dp)
Margin of Safety (Dollars) = Expected Sales × Margin of Safety %
= $ 696000×30.46%
= $ 212000
Margin of Safety (Units) = Expected Sales Units × Margin of Safety %
= 17 400×30.46%
= 5 400
Part 5. What is the company’s CM ratio? If sales increase by $80,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
Contribution Margin Ratio = Contribution/Sales
(A) Contribution Margin Ratio is $12/$40×100 = 30%.
(B) If sales increase by $80,000, then net operating income to increase by $80000
