Menlo Company distributes a single product. The company’s sales and expenses for
ID: 2391522 • 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 $74,400?
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 $65,000 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 $ 636,000 $ 40 Variable expenses 445,200 28 Contribution margin 190,800 $ 12 Fixed expenses 147,600 Net operating income $ 43,200Explanation / Answer
Sales per unit $40 Variable expenses per unit $28 Unit Contribution margin $12 (40-28) Fixed expenses $147,600 1 Monthly Break even point in unit sales 12,300 (147600/12) Monthly Break even point in dollar sales $ 492,000 (12300*$40) 2 Total Contribution Margin at Break even point At Breakeven point Profit=0 Profit=Sales -Variable expense-Fixed Expense (Sales-Variable expense)=Fixed expense Total Contribution Margin=Fixed expense Total Contribution Margin= $147,600 3a Target Profit=$74400 Unit of Sales required for contribution of $74400 6,200 (74400/12) Unit of Sales required for Profit of $74400 18,500 (6200+12300) 3b Contribution Format Income Statement: Sales $ 740,000 (18500*40) Variable expenses $ 518,000 (18500*28) Contribution Margin $ 222,000 Fixed Expenses $147,600 Profit $ 74,400 4 Margin of Safety in dollars $ 144,000 (636000-492000) Margin of Safety in percentage 29.27% (144000/492000)*100 5 CM (Contribution Margin Ratio)=Contribution Margin/Sales CM=12/40= 0.3 CM in percentage 30% If sales Increases by $65000 Increase in Contribution =0.3*65000 $ 19,500 Increase in net operating Income $ 19,500