Menlo Company distributes a single product. The company\'s sales and expenses fo
ID: 2394647 • Letter: M
Question
Menlo Company distributes a single product. The company's sales and expenses for last month follow: Per Unit S 40 28 Total Sales Variable expenses $624,000 436,800 $ 12 Contribution margin Fixed expenses 187,200 146,400 Net operating income $ 40,800 Required 1. What is the monthly break-even point in unit sales and in dollar sales? Break-even point in unit sales units Break-even point in sales dollars 2. Without resorting to computations, what is the total contribution margin at the break-even point? Total contribution marginExplanation / Answer
1) Break even point in units sales = Fixed expenses/Contribution margin per unit
= $146,400/$12 per unit = 12,200 units
Break even point in dollar sales = Break even units*Selling price per unit
= 12,200 units*$40 per unit = $488,000
2) At break even point there is no profit and no loss (i.e Zero profit) therefore contribution margin is equal to fixed cost at the break even point. Hence the total contribution margin at the break even point is $146,400 (i.e. equal to fixed cost).
3-a) Required Units sales = (Fixed cost+Target profit)/Contribution margin per unit
= ($146,400+$72,000)/$12 per unit = $218,400/$12 = 18,200 units
Therefore 18,200 units have to be sold each month to earn a target profit of $72,000.
3-b) Menlo Company
Contribution Income Statement (Amounts in $)
4) Margin of safety in dollars = Sales at original data - Break even sales in dollars
= $624,000 - $488,000 = $136,000
Margin of safety in percentage = Margin of safety sales/Total sales (original data)
= $136,000/$624,000 = 21.79%
5) Contribution margin ratio = Contribution margin per unit/Selling price per unit
= $12/$40 = 30%
Net operating income would increase by the amount of additional contribution margin from additional sales which is calculated as follows:-
Increase in sales*CM ratio = $72,000*30% = $21,600
Particulars Total Per unit Sales (18,200 units) 728,000 40 Variable expenses 509,600 28 Contribution margin 218,400 12 Fixed expenses 146,400 Net Operating Income 72,000