Question

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

	Total			Per Unit
Sales	$	604,000		$	40
Variable expenses		422,800			28
Contribution margin		181,200		$	12
Fixed expenses		154,800
Net operating income	$	26,400

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 $63,600?

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 $74,000 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 = 154800/12 = 12900 Units

Break even sales = 12900*40 = $516000

2) Total contribution margin at break even = 154800

3a) Required unit = (154800+636000/12 = 18200 Units

3b) Contribution margin income statement

Sales	728000
variable cost	509600
Contribution margin	218400
Fixed cost	154800
Operating income	63600

4) Margin of safety = 604000-516000 = 88000

Margin of safety (%) = 88000/604000 = 14.57%

5) CM ratio = 12/40 = 30%

Net operating income increase = 74000*30% = 22200