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

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		148,800
Net operating income	$	32,400

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 $72,000?

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?

 

Explanation

1.

Profit	=	Unit CM × Q − Fixed expenses
$0	=	($40 − $28) × Q − $148,800
$0	=	($12) × Q − $148,800
$12Q	=	$148,800
Q	=	$148,800 ÷ $12 per unit
Q	=	12,400 units, or at $40 per unit, $496,000

2.

The contribution margin is $148,800 because the contribution margin is equal to the fixed expenses at the break-even point.

3-a.

The unit sales to attain the target profit is computed as follows:

Unit sold to attain target profit	=	Target profit + Fixed expenses
		Unit contribution margin
	=	$72,000 + $148,800	= 18,400 units
		$12

3-b.

Sales (18,400 units × $40 per unit) = $736,000

Variable expenses (18,400 units × $28 per unit) = $515,200

4.

Margin of safety in dollar terms:

Margin of safety in dollars	=	Total sales − Break even sales
	=	$604,000 − $496,000 = $108,000

Margin of safety in percentage terms:

Margin of safety percentage	=	Margin of safety in dollars
		Total sales
	=	$108,000	= 17.88%
		$604,000

5.

The CM ratio is 30% [ = ($40 − $28) ÷ $40].

Expected total contribution margin: ($655,000 × 30%)	$	196,500
Present total contribution margin: ($604,000 × 30%)		181,200
Increased contribution margin	$	15,300

Thank you!