Question

CHAPTER 6 HOMEWORK

Exercise 6-18 Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio [LO6-1, LO6-3, LO6-5, LO6-6, LO6-7]

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

	Total			Per Unit
Sales	$	318,000		$	20
Variable expenses		222,600			14
Contribution margin		95,400		$	6
Fixed expenses		72,600
Net operating income	$	22,800

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 $40,800?

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 $91,000 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.
BEP (Units) = Fixed exp/Contribution Margin per unit = 72600/6 = 12,100 Units
BEP (Sales $) = 12,100*$20 = $242,000

2. Fixed exp = $72,600

3.
Total Contribution = Fixed exp + Target Profit = 72600+40800 = $113,400
So No of Units sold = 113400/Contribution per unit = 113400/6 = 18,900 units

4. MOS = (Total Sales - BEP Sales) = $318000 - $242000 = $76,000
MOS % = Margin of safety in dollars / Total budgeted or actual sales
= $76000/$318,000 = 23.90%

5. CM Ratio = Total Contribution/Sales = 95400/318000 = 30%

Net Operating Income Increased by = Inc in Sales*CM Ratio = 30%*$91000 = $27,300