Question

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

Total Per Unit

Sales $320,000 $ 20

Variable expenses 224,000 14

Contribution margin 96,000 $ 6

Fixed expenses 75,000

Net operating income $ 21,000

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 $61,000 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 point (units) = 75000/6 = 12500 Units

Break even point (dollars) = 12500*20 = $250000

2) Total Contribution margin at break even = Fixed cost = $75000

3a) Required sales unit = (75000+33600)/6 = 18100 Units

3b) Contribution margin

Sales (18100*20)	362000
Variable cost (18100*14)	253400
Contribution margin	108600
Fixed cost	75000
Net operating income	33600

4) Margin of safety (dollars) = 320000-250000 = $70000

Margin of safety (percentage) = 70000/320000 = 21.875%

5) CM ratio = 6/20 = 30%

Net operating income increase by 61000*30% = $18300