Question

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		76,800
Net operating income	$	18,600

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 earn a target profit of $30,000? Use the formula method.

3-b. Verify your answer by preparing a contribution format income statement at the target sales level.

4. Refer to part 3 and now assume that the tax rate is 40%. How many units would need to be sold each month to an after-tax target profit of $30,000?  (Round the final answer to the nearest whole number.)

5. 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).)

6. What is the company’s CM ratio? If monthly sales increase by $75,000 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 = 76800/6 = 12800 Units

Break even sales = 12800*20 = 256000

2) Total Contribution margin = 76800

3a) Target unit = (76800+30000)/6 = 17800 Units

3b) Contribution margin income statement

Sales (17800*20)	356000
Variable cost	249200
Contribution margin	106800
Fixed cost	76800
Operating income	30000

4) Target unit = (76800+50000)/6 = 21133 Units

5) Margin of safety = 318000-256000 = 62000

Margin of safety (%) = 62000/318000 = 19.50%

6) CM ratio = 6/20 = 30%

Net operating income increase by (75000*30%) = 22500