Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow: Total Per Unit Sales $ 624,000 $ 40 Variable expenses 436,800 28 Contribution margin 187,200 $ 12 Fixed expenses 147,600 Net operating income $ 39,600 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 $58,800? 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 $78,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

(1)

BEP units 12167

BEP dollars 486,667

(2) BEP CM = Fixed Cost = 147,600

(3)

17,158

(4)

Margin 137,333

Margin percent of sale 22%

(5)

The CM ratio does not change, because the variable expenses increase as well. In the given information are the fixed cost which doesn't change. they have no impact in the contribution calculation. So CM keps at 30%

The operating income will increase by ↑Sales x CMR

↑78,000 x .3 = ↑23,400

Step-by-step explanation:

(1)

`(Fixed\:Cost)/(Contribution \:Margin \:Ratio) = Break\: Even\: Point_(dollars)`

`(Fixed\:Cost)/(Contribution \:Margin) = Break\: Even\: Point_(units)`

`Sales \: Revenue - Variable \: Cost = Contribution \: Margin`

`(Contribution Margin)/(Sales Revenue) = $Contribution Margin Ratio`

40 - 28 = 12

12/40 = 0.30

147,600/12 = 12166.67 = 12167

147,600/0.3 = 486666.67

(3)

`(Fixed\:Cost + \: Target \: Profit)/(Contribution \:Margin) = Sales\: to\: Profits{units}`

(147,600 + 58,300)/12 = 17,158.33 = 17,158

(4)

`current \:sales - BEP_(USD)`

624,000 - 486,667 = 137,333

`(current \:sales - BEP_(USD))/(current \:sales) * 100 = margin \: of \: safety`

137,333/624,000 x 100 = 22.008%