Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow: Total Per Unit Sales $ 306,000 $ 20 Variable expenses 214,200 14 Contribution margin 91,800 $ 6 Fixed expenses 76,200 Net operating income $ 15,600 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 $28,800? 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 $73,000 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) Break even unit = Fixed cost/Contribution margin per unit = 73800/6 = 12300 Units

Break even sales = 12300*20 = $246000

2) Total contribution margin at break even = Fixed cost = $73800

3) Required unit = (Fixed cost+Desired profit)/Contribution margin per unit = (73800+33600)/6 = 17900 Units

4) Contribution margin income statement

Sales (17900*20) 358000

Variable cost 250600

Contribution margin 107400

Fixed cost 73800

Operating income 33600

5) Margin of safety = 306000-246000 =60000

Margin of safety percentage = 60000/306000 = 19.61%

6) CM ratio = 6/20 = 30%

If sales increase by 96000 then net operating income to increase by (96000*30%) = 28800

Step-by-step explanation: