Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow: Total Per Unit Sales $ 604,000 $ 40 Variable expenses 422,800 28 Contribution margin 181,200 $ 12 Fixed expenses 145,200 Net operating income $ 36,000 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 $63,600? 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 $80,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

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