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

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Asked: April 10, 20222022-04-10T07:39:44+00:00 2022-04-10T07:39:44+00:00In: Accounting

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

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

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

Required:

What is the monthly break-even point in unit sales and in dollar sales?
Without resorting to computations, what is the total contribution margin at the break-even point?

a. How many units would have to be sold each month to attain a target profit of $29,400?

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 $70,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

♦ Relevant knowledge

Under the cost-volume-profit (CVP) analysis the costs are classified as fixed or variable. If costs are classified as this, break-even analysis as well as target profit analysis may be conducted. Break-even analysis could be regarded as targeted profit analysis when the profit target is zero. It can be calculated by a quantity of units or dollars sold.

Break-even point may be described as the number of amount of sales that a company must make to pay for the costs. At break-even the business will have earned enough cash that it would be in the no-loss, no-profit situation.

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2 Answers

tonytutoria

2022-04-10T07:39:46+00:00Added an answer on April 10, 2022 at 7:39 am

Ans. 1	Break even point in unit sales = Fixed expenses / Contribution margin per unit
	$75,600 / $6
	12,600 units

	Breakeven point in dollars sales = Breakeven in units
	12,600 * $20
	$252,000

Ans. 2	At break-even point, the company’s contribution margin equals its fixed
	Operating income is less than the break-even level of sales.
	The company is gone and the operating income is what makes it different.
	Fixed cost and contribution margin

	Contribution margin = $75,600.

Ans. 3 a	Unit sales to target profit = (Fixed expenses + Target profit / Contribution margin per units
	($75,600 + $29,400) / $6
	$105,000 / $6
	17,500 units

Ans. 3 b	MENLO COMPANY
	CVP Income Statement
		Total	Per unit
	Sales (17,500 *p)	$350,000	$20.00
	Variable expenses (17,500 * v)	-$245,000	-$14.00
	Margin of contribution	$105,000	$6.00
	Fixed expenses	-$75,600
	Net operating income (Target Profit)	$29,400

	P = price per unit
	V = variable cost per unit

Ans. 4	Margin of Safety in Dollars = Actual Sales in Dollars – Break Even Sales in Dollars
	$312,000 – $252,000
	$60,000

	Margin percentage = Margin safety / Sales * 100
	$60,000 / $312,000 * 100
	19.23%

Ans. 5	Contribution margin ratio = Contribution margin per unit / Selling price per unit * 100
	$6 / $20 * 100
	30%

	Increased contribution margin = Sales increases * Contribution margin ratio
	$70,000 * 30%
	$21,000

	*The change in sales does not affect the fixed cost so the incremental contribution margin will remain the same.
	equal to the increase of net operating income.

	So the expected increase in net operating income would be = $21,000.