Answer: See explanation
Step-by-step explanation:
1. What is the monthly break-even point in unit sales and in dollar sales?
Break even point in unit sales:
= Fixed expenses/Unit Contribution margin
= 152,400/12
= 12,700 units
Break even point in dollar sales will be:
= 152,400×40/12
= $508,000
2. Without resorting to computations, what is the total contribution margin at the break-even point?
Total contribution margin at the break even point will be the unit Contribution margin multiplied by the break even point in units
= 12× $12,700
= $152,400
3-a. How many units would have to be sold each month to attain a target profit of $56,400?
Sales in units:
= ($152,400+$56400)/12
= $208800/12
= 17400
b. Verify your answer by preparing a contribution format income statement at the target sales level.
Sales (17400×40) = $696,000
Less: Variable expenses (17400×28) = $487,200
Contribution margin = $208,800
Less: Fixed expenses = $152,400
Net operating income = $56,400
Since net operating income is also $56,400, the answer has been verified.
4. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms.
Margin of safety in dollars will be:
= Sales - Break even sales
= 624,000-508,000
= $116,000
Percentage of Margin of safety:
= 116,000/624,000
= 0.1859
= 18.59%
5. What is the company’s CM ratio? If the company can sell more units thereby increasing sales by $94,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
CM ratio will be the unit Contribution margin divided by the sales per unit. This will be:
= 12÷40
= 0.30
= 30%
Increase in sales = $94000
New sales:
= Sales + Increase in sales
= $624,000+$94,000
= $718,000
New Contribution margin:
= 718000×30%
= 718000 × 0.3
= $215400
New Net operating income:
= 215400-152,400
= $63000
Increase in net operating income
= $63000 - $34800
= $28200