Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow:

	Total			Per Unit
Sales	$	310,000		$	20
Variable expenses		217,000			14
Contribution margin		93,000		$	6
Fixed expenses		73,200
Net operating income	$	19,800

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 $33,600?

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 $51,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

1) Break even unit = 73200/6 = 12200 Units

Break even Sales = 12200*20 = $244000

2) Contribution margin at break even = Fixed cost = 73200

3a) Target unit = (73200+33600)/6 = 17800 Units

3b) contribution margin

Sales	356000
Variable cost	249200
Contribution margin	106800
Fixed cost	73200
Operating income	33600

4) Margin of safety = 310000-244000 = 66000

Margin of safety (%) = 66000/310000 = 21.29%

5) CM ratio = 6/20 = 30%

Sales increase by 51000 net operating income increase by (51000*30%) = 15300