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Menlo Company distributes a single product
Menlo Company distributes a single product. The company's sales and expenses for last month follow:
Total Per Unit Sales $ 308,000 $ 20 Variable expenses 215,600 14 Contribution margin 92,400 $ 6 Fixed expenses 73,200 Net operating income $ 19,200
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 $31,800? 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 the company can sell more units thereby increasing sales by $73,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
Complete this question by entering your answers in the tabs below.
Expert Solution
1)
(a) Breakeven Point in Unit Sales = Fixed cost / Contribution margin per unit
= $73,200 / $6
= 12,200 Units
(b) Breakeven Point in Dollar Sales = 12,200 * $20 = $244,000
2) Total contribution margin at Breakeven Point shall be equal to Fixed Cost = $73,200
3-a) Required Sales = (Fixed COst + Target Profit)/Contribution Margin per Unit
= ($73,200+$31,800)/$6
= 17,500 units
3-b)
| Menlo Company | |
| Contribution Income Statement | |
| Particulars | Amount ($) |
| Sales (17,500 units*$20) | 350000 |
| Less: Variable Expenses (17,500*$14) | 245000 |
| Contribution Margin | 105000 |
| Less: Fixed Expenses | 73200 |
| Net Operating Income | 31800 |
4)
Margin of safety in Dollars = Actual Sales - Breakeven Sales
= 308000 - 244000
= $64,000
Margin of safety in % = 64000 / 308000 * 100 = 20.78%
5)
CM ratio remains same, unless there is change in selling price per unit or variable cost per unit
CM Ratio = $6 / $20 * 100 = 30 %
Net operating income increase by = 73,000 * 30% = $21,900
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