Menlo Company distributes a single product. The company’s sales and expenses for
ID: 2336789 • Letter: M
Question
Menlo Company distributes a single product. The company’s sales and expenses for last month follow:
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 $30,600?
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 $56,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
Total Per Unit Sales 300,000 20 Variable expenses 210,000 14 Contribution margin 90,000 6 Fixed expenses 72,600 Net operating income 17,400Explanation / Answer
1. Monthly break-even point in unit sales = Fixed Expenses / Unit Contribution Margin = $ 72,600 / $ 6 = 12,100 units.
Monthly break-even point in dollar sales = Fixed Expenses / Contrbution Margin Ratio = $ 72,600 / ( $ 90,000 / $ 300,000 ) = $ 242,000.
2. Total contribution margin at the break-even point = Fixed Expenses = $ 72,600.
3-a. Monthly unit sales for a taget profit of $ 30,600 = ( Fixed Expenses + Target Profit) / Unit Contribution Margin = $ ( 72,600 + 30,600) / $ 6 = 17,200 units.
3-b.
4. Margin of safety in dollar terms = Actual Dollar Sales - Break-even Dollar Sales = $ 300,000 - $ 242,000 = $ 58,000.
Margin of safety percentage = $ 58,000 / $ 300,000 * 100 = 19.33 %
5. The company's CM ratio = Contribution Margin / Selling Price = $ 6 / $ 20 = 30 %.
If sales increase by $ 56,000 per month, monthly net operating income will increase by $ 56,000 x 30% = $ 16,800.
Sales ( 17,200 x $ 20) $ 344,000 Variable Expenses 240,800 Contribution Margin 103,200 Fixed Expenses 72,600 Net Operating Income $ 30,600