Question

SIMPLE manufactures and sells a single product. The company’s sales and expenses for last quarter follow: Total Per Unit Sales $600,000 $40 Less: Variable Expenses $420,000 $28 Contribution Margin $180,000 $12 Less: Fixed Expenses $146,520 Net Operating Income $33,480 Required: What is the monthly break-even point in units sold and in sales dollars? Without resorting to computations, calculate the total contribution margin at the break-even point. How many units would have to be sold each quarter to earn a target profit of $18,000? Use the formula method. Verify your answer by preparing a contribution format income statement at the target level of sales. Refer to the original data. Compute the company’s margin of safety for the quarter in both dollar and percentage terms. What is the company’s CM ratio? If quarterly sales increase by $80,000 and there is no change in fixed expenses, by how much would you expect quarterly net operating income to increase? (Do not prepare an income statement; use the CM ratio to calculate your answer.)

Answer 1

1) Break even unit = 146520/12 = 12210 Units

Break even sales = 12210*40 = $488400

2) Total Contribution margin at break even = Fixed cost = $146520

3) Required unit = (146520+18000)/12 = 13710 Units

Contribution margin income statement

	Total	Per unit
Sales	13710*40 = 548400	40
Variable cost	383880	28
Contribution margin	164520	12
Fixed cost	146520
Net income	18000

4) Margin of safety = 600000-488400 = 111600

Margin of safety (%) = 111600/600000 = 18.6%

5) CM ratio = 12/40 = 30%

Net operating income increase by 80000*30% = 24000