Menlo Company distributes a single product. The company\'s sales and expenses fo
ID: 2434941 • Letter: M
Question
Menlo Company distributes a single product. The company's sales and expenses for last month follow:Total Per Unit
Sales $1,057,000 $70
Variable expenses 739,900 49
Contribution margin 317,100 $21
Fixed expenses 268,800
Net operating income $48,300
Requirement 1:
What is the monthly break-even point in units sold and in sales dollars? (Omit the "$" sign in your response.)
Monthly break-even point units
Sales $
Requirement 2:
Without resorting to computations, what is the total contribution margin at the break-even point? (Omit the "$" sign in your response.)
Total contribution margin at the break-even point $
Requirement 3:
How many units would have to be sold each month to earn a target profit of $119,700? Use the formula method.
Units sold units
Requirement 4:
Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. (Round your percentage value to 2 decimal places. Omit the "$" and "%" signs in your response.)
Dollars Percentage%
Margin of safety $
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Requirement 5:
What is the company's CM ratio? If sales increase by $86,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? (Round your percentage value to nearest whole percent. Round your dollar value to the nearest dollar amount. Omit the "$" and "%" signs in your response.)
CM ratio %
Increased net operating income $
Explanation / Answer
1) The monthly break even point in units sold is computed as: To calculate the break even point, we should calculate the contribution margin per unit. CM per unit = Selling price per unit - Variable cost per unit = 70 - 49 = 21 Breakeven point in units = Fixed costs / CM per unit = 268800 / 21 = 12800 Breakeven point in dollars = Fixed costs / Contribution margin ratio But CM ratio = CM per unit / Selling price per unit = 21 / 70 = 0.3 Breakeven point in dollars = 268800 / 0.3 = 896000 2) Without resoting to computations, the total contribution at breakeven point is equal to fixed costs because breakeven point is simply the sales level that results in a zero net income. 3) Dollar sales volume = (Fixed costs + Target profit) / Unit contribution margin = (268800 + 119700 ) / 21 = 388500 / 21 = 18500 4) Margin of safety in dollars = Actual sales - Breakeven sales = 1,057,000 - 896,000 = 161,000 Margin of safety in percentage = Margin of safety in dollars / Total budgeted sales = 161,000 / 1,057,000 = 0.1523 or 15.23% 5) CM ratio = CM per unit / Selling price per unit = 21 / 70 = 0.3 If sales increase by 20% then the net operating income would increase by Sales 1,143,000 (-) Variable costs 800,100 -------------------------------------- Contribution margin 342,900 (-) Fixed costs 268,800 ------------------------------------ Net operating income 74,100 -------------------------------------- With 86,000 increase in sales, the net operating income increased by 0.534 or 53.4%