Menlo Company distributes a single product. The company\'s sales and expenses fo
ID: 2547805 • Letter: M
Question
Menlo Company distributes a single product. The company's sales and expenses for last month follow: Per Unit 20 14 Total Sales Variable expenses Contribution margin Fixed expenses Net operating income $ 320,000 224,000 96,000 76,800 $ 19,200 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 $34,200? 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 $83,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?Explanation / Answer
REQ 1.Break-Even pint in unit sales and in Dollar sales
Break-Even pint in unit sales = Fixed Cost / ( Selling Price/unit – Variable cost/unit )
= $76800 / ( $20 - $14)
= $76800/$6
= 12800 Units
Break-Even pint in Dollar Sales = Fixed Cost / Contribution Ratio
= $ 76800 / 30%
= $ 2,56,000
REQ 2.Total Contribution margin at the Break-Even Point
Total Contribution margin at the Break-Even Point = $ 76,800
( The contribution margin at the break even poits is $76800 it is because the point must equal to the fixed expenses )
REQ 3A. Units to be sold to attain a target profit of $34200
unit sold to attain target profit = ( Target profit + Fixed Expenses) / unit contribution margin
Units = ( $ 34200 + $ 76800 ) / $ 6 per unit = 18,500 units
REQ 3B. Income Statement
TOTAL Per Unit
Sales (18500 units X $20 per unit) $ 370000 $20
Variable Expenses (18500 units x $14 per unit) $ 259000 $ 14
Contribution Margin (18500 units x $6 per unit) $ 111000 $ 6
Fixed expenses $ 76800
Net operating income $ 34200
REQ 4. Margin of safety in Dollar and Percentage
Margin of safety in dollars = Total Sales - Break-even sales
= $ 320000 - $ 256000
= $ 64000
Margin of safety % = Margin of safety in dollars/ Total Sales
= $ 64000 / $ 320000 * 100
= 20%
REQ - 5
The CM ratio is 30%
Expected total contribution margin: $ 403000 x 30% = $ 120900
Present total contribution margin: $ 320000 x 30% = $ 96000
Increased contribution margin = $ 24900
$ 83,000 incremental sales x 30% CM ration = $24900
the company's fixed expeses will not change and the monthly net operating income will increseby the increase contibution amount margin of $24900