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Elina [12.6K]
3 years ago
7

Exercise 6-18 Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio [LO6-1, LO6-3, LO6-5, LO6-6, LO6-7]Menlo Company

distributes a single product. The company’s sales and expenses for last month follow: Total Per UnitSales$640,000 $40 Variable expenses 448,000 28 Contribution margin 192,000 $12 Fixed expenses 145,200 Net operating income$46,800 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?3-a. How many units would have to be sold each month to attain a target profit of $75,600?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 $96,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
Business
1 answer:
bonufazy [111]3 years ago
5 0

Answer:

Instructions are below.

Explanation:

Giving the following information:

Sales= $640,000 ($40)

Variable expenses= 448,000 (28)

Contribution margin= 192,000 ($12)

Fixed expenses= (145,200)

Net operating income=$46,800

1) To calculate the break-even point in units and dollars, we need to use the following formulas:

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 145,200/(40-28)

Break-even point in units= 12,100 units

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 145,200/ (12/40)

Break-even point (dollars)= $484,000

<u>2) The break-even point is the number of units to sell to reach a net profit of cero. Therefore, the contribution margin must be equal to the fixed costs.</u>

Contribution margin= 145,200

3) profit= $75,600

Break-even point in units= (fixed costs + desired profit)/ contribution margin per unit

Break-even point in units= 220,800/12

Break-even point in units= 18,400 units

Sales= 18,400*40= 736,000

Total variable costs= 18,400*28= (515,200)

Contribution margin= 220,800

Fixed costs= 145,200

Net profit= 75,600

4) The margin of safety:

Margin of safety= (current sales level - break-even point)

Margin of safety= 640,000 - 484,000= $156,000

Margin of safety ratio= (current sales level - break-even point)/current sales level

Margin of safety ratio= 156,000/640,000

Margin of safety ratio= 0.244= 24.4%

5) Contribution margin ratio= 12/40= 0.3

Net increase= 96,000*0.3= $28,800

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Denzel Brooks opened a Web consulting business called Venture Consultants and completes the following transactions in March Marc
san4es73 [151]

Answer:

1. Prepare general journal entries to record these transactions using the following titles:

March 1

Dr Cash (101) 175,000

Dr Office Equipment (163) 26,000

    Cr Common Stock (307) 201,000

March 2

Dr Prepaid Rent (131) 6,000

    Cr Cash (101) 6,000

March 3

Dr Office Equipment (163) 3,800

Dr Office Supplies (124) 2,200

    Cr Accounts Payable (201) 6,000

March 6

Dr Cash (101) 4,500

    Cr Services Revenue (403) 4,500

March 9

Dr Accounts Receivable (106) 10,900

    Cr Services Revenue (403) 10,900

March 12

Dr Accounts Payable (201) 6,000

    Cr Cash (101) 6,000

March 19

Dr Prepaid Insurance (128) 6,400

    Cr Cash (101) 6,400

March 22

Dr Cash (101) 4,000

    Cr Accounts Receivable (106) 4,000

March 25

Dr Accounts Receivable (106) 5,330

    Cr Services Revenue (403) 5,330

March 29

Dr Dividends (319) 5,400

    Cr Cash (101) 5,400

March 30

Dr Office Supplies (124) 1,700

    Cr Accounts Payable (201) 1,700

March 31

Dr Utilities Expense (690) 1,400

    Cr Cash (101) 1,400

2. Post the journal entries from part 1 to the ledger accounts.

Account      Description                                  Debit         Credit

101               Cash                                           175,000

                                                                                           6,000

                                                                          4,500

                                                                                           6,000

                                                                                           6,400

                                                                          4,000

                                                                                           5,400

<u>                                                                                             1,400  </u>

101               Cash                                           158,300

106              Accounts Receivable                 10,900        

                                                                                           4,000

<u>                                                                          5,330                     </u>

106              Accounts Receivable                 12,330

124              Office Supplies                            2,200

<u>                                                                          1,700                        </u>

124              Office Supplies                            3,900

128              Prepaid Insurance                       6,400

131               Prepaid Rent                                 6,000

163              Office Equipment                        26,000

<u>                                                                            3,800                      </u>

163              Office Equipment                        29,800

201              Accounts Payable                                              6,000

                                                                           6,000

<u>                                                                                                 1,700    </u>

201              Accounts Payable                                               1,700

307             Common Stock                                               201,000

319              Dividends                                       5,400

403             Services Revenue                                              4,500

                                                                                              10,900

<u>                                                                                                 5,330    </u>

403             Services Revenue                                             20,730

690             Utilities Expense                            1,400

3. Prepare a trial balance as of April 30.

Account      Description                                  Debit         Credit

101               Cash                                           158,300

106              Accounts Receivable                  10,900        

106              Accounts Receivable                  12,330

124              Office Supplies                             3,900

128              Prepaid Insurance                        6,400

131               Prepaid Rent                                 6,000

163              Office Equipment                        29,800

201              Accounts Payable                                               1,700

307             Common Stock                                               201,000

319              Dividends                                       5,400

                   Retained earnings                                             11,000

403             Services Revenue                                             20,730

690             Utilities Expense                            1,400

<u>                                                                                                                 </u>                

TOTAL                                                           234,430       234,430                                              

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