question archive Menlo Company distributes a single product
Menlo Company distributes a single product
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Menlo Company distributes a single product. The company’s sales and expenses for last month follow:
| Total | Per Unit | |||||
| Sales | $ | 316,000 | $ | 20 | ||
| Variable expenses | 221,200 | 14 | ||||
| Contribution margin | 94,800 | $ | 6 | |||
| Fixed expenses | 76,800 | |||||
| Net operating income | $ | 18,000 | ||||
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 $32,400?
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?
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Answer:
| Selling price per unit | 20 |
| Less: Variable cost per unit | 14 |
| Contribution Margin per unit | 6 |
| Contribution Margin ratio [(6/20)*100] | 30% |
| 1. Calculation of Break even point in units | |
| Particulars | $ |
| Fixed expenses | 76800 |
| Contribution Margin per unit | 6 |
| Break even point in units (76800/6) | 12800 |
| Calculation of Break even point in Dollars | |
| Fixed expenses | 76800 |
| Contribution Margin ratio | 30% |
| Break even point in Dollars (76800/30%) | 256000 |
| 2. Without resorting to computations, what is the total contribution margin at the break-even point? | |
| At breakeven point, Contribution margin is equal to fixed costs. Therefore, contribution margin is $ 76800. | |
| 3-a. How many units would have to be sold each month to attain a target profit of $32,400? | |
| Target profit | 32400 |
| Add: Fixed Costs | 76800 |
| Contribution margin | 109200 |
| Contribution Margin per unit | 6 |
| Number of units to be sold. (109200/6) | 18200 |
| 3-b. Verify your answer by preparing a contribution format income statement at the target sales level. | |
| Sales (18200*20) | 364000 |
| Less: Variable Costs (18200*14) | 254800 |
| Contribution Margin (364000 - 254800) | 109200 |
| Less: Fixed Costs | 76800 |
| Target Profit (109200 - 76800) | 32400 |
| 4. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. | |
| Actual sales | 316000 |
| Break even point in Dollars (76800/30%) | 256000 |
| Margin of safety in dollars (316000-256000) | 60000 |
| Margin of safety in dollars (60000/316000) | 18.99% |
| 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? | |
| Contribution Margin ratio [(6/20)*100] | 30% |
| Increase in contribution margin (61000*30%) | 18300 |
| Monthly increase in Net operating Income | 183 |
