Exercise 5-18 Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio
ID: 2540684 • Letter: E
Question
Exercise 5-18 Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio [LO5-1, LO5-3, LO5-5, LO5-6, LO5-7]
Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).
What is the company’s CM ratio? If monthly sales increase by $80,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
Menlo Company distributes a single product. The company’s sales and expenses for last month follow:
Explanation / Answer
Particulars
Total
Per Unit
Sales
$632,000
40
Less: Variable expenses
$442,400
28
Contribution margin
$189,600
12
Fixed expenses
$145,200
Net operating income
$44,400
1
What is the monthly break-even point in unit sales and in dollar sales?
Break even = (Fixed cost/contribution per unit)*sale price per unit
Break even = (145,200/12)*40
Ans
Break even in dollers= $484,000
Break even in units (145,200/12) = 12,100 units
2
Without resorting to computations, what is the total contribution margin at the break-even point?
Contribution margin at break even point = fixed cost (or) break even units*Contribution margin per unit
Contribution margin at break even point = $145,200 (or) ($12*12,100)
Ans
Contribution margin at break even point = $145,200
3-a
How many units would have to be sold each month to earn a target profit of $70,800? Use the formula method.
sales to earn desired profit = (Fixed cost+Desired profit)/contribution per unit
sales to earn desired profit = (145,200+70,800)/12 = 18,000 units
3-b
Verify your answer by preparing a contribution format income statement at the target sales level.
Amount
Sales 18,000 units*$40
$720,000
Less: Variable cost @ $28
$504,000
Contribution margin
$216,000
Less: Fixed cost
$145,200
Operating profit
$70,800
4
Compute the company's margin of safety in both dollar and percentage terms.
Margin of safety = Profit/P.V Ratio
P.v ratio = contribution/sales*100 = 12/40*100 =30%
Margin of safety = $44,400/30% = $148,000
Margin of safety = $148,000
Margin of safety %= $148,000/632,000 *100 = 23.42%
5
What is the company’s CM ratio? If monthly sales increase by $80,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
Company’s CM ratio =12/40*100 = 30%
Revenue if monthly sales increased by 80,000
$712,000
CM = sales*CM ratio
$213,600
Less: Fixed cost
$145,200
Net operating income
$68,400
Increase in operating income
$24,000
Particulars
Total
Per Unit
Sales
$632,000
40
Less: Variable expenses
$442,400
28
Contribution margin
$189,600
12
Fixed expenses
$145,200
Net operating income
$44,400
1
What is the monthly break-even point in unit sales and in dollar sales?
Break even = (Fixed cost/contribution per unit)*sale price per unit
Break even = (145,200/12)*40
Ans
Break even in dollers= $484,000
Break even in units (145,200/12) = 12,100 units
2
Without resorting to computations, what is the total contribution margin at the break-even point?
Contribution margin at break even point = fixed cost (or) break even units*Contribution margin per unit
Contribution margin at break even point = $145,200 (or) ($12*12,100)
Ans
Contribution margin at break even point = $145,200
3-a
How many units would have to be sold each month to earn a target profit of $70,800? Use the formula method.
sales to earn desired profit = (Fixed cost+Desired profit)/contribution per unit
sales to earn desired profit = (145,200+70,800)/12 = 18,000 units
3-b
Verify your answer by preparing a contribution format income statement at the target sales level.
Amount
Sales 18,000 units*$40
$720,000
Less: Variable cost @ $28
$504,000
Contribution margin
$216,000
Less: Fixed cost
$145,200
Operating profit
$70,800
4
Compute the company's margin of safety in both dollar and percentage terms.
Margin of safety = Profit/P.V Ratio
P.v ratio = contribution/sales*100 = 12/40*100 =30%
Margin of safety = $44,400/30% = $148,000
Margin of safety = $148,000
Margin of safety %= $148,000/632,000 *100 = 23.42%
5
What is the company’s CM ratio? If monthly sales increase by $80,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
Company’s CM ratio =12/40*100 = 30%
Revenue if monthly sales increased by 80,000
$712,000
CM = sales*CM ratio
$213,600
Less: Fixed cost
$145,200
Net operating income
$68,400
Increase in operating income
$24,000