I\'d like help with the following problem, but please explain how you arrive at

Question

I'd like help with the following problem, but please explain how you arrive at your answers. Thank you.

Exercise 5-11 Break-Even Analysis; Target Profit; Margin of Safety; CM Ratio [LO1, LO3, LO5, LO6, LO7] Pringle Company distributes a single product. The company’s sales and expenses for a recent month follow: Total    Per Unit   Sales $ 304,000 $ 20        Variable expenses 212,800 14        Contribution margin 91,200 $ 6        Fixed expenses 74,400   Net operating income $   16,800 Required: 1. What is the monthly break-even point in units sold and in sales dollars? (Omit the "$" sign in your response.)   Break-even point in unit sales units   Break-even point in sales dollars $           2. Without resorting to computations, what is the total contribution margin at the break-even point? (Omit the "$" sign in your response.)   Total contribution margin $ 3. How many units would have to be sold each month to earn a target profit of $31,800? Use the formula method.   Units sold Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. (Round your percentage answer to 2 decimal places. Omit the "$" and "%" signs in your response.)       Dollars   Percentage      Margin of safety $ % 5. What is the company’s CM ratio? If monthly sales increase by $63,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? (Omit the "$" and "%" signs in your response.)   CM ratio %   Net operating income increases by $      

Explanation / Answer

1. Monthly breakeven point in unit sales = Fixed cost / contribution margin per unit = 74,400 / 6 = 12,400

Monthly breakeven point in dollar sales = 12,400 x 20 = $ 248,000.

2. At the breakeven point, total contribution margin equals fixed cost or $ 74,400.

3. If the target profit is $ 31,800, required sales in units = (Fixed cost + Target profit) / contribution margin per unit = (74,400 + 31,800) / 6 = 17,700 units

4. Margin of safety in dollar terms = (17,700 x 20 - 248,000) = $ 106,000

Margin of safety as a percentage = 106,000 / 354,000 x 100 = 29.94%

5. The contribution margin ratio = 6 / 20 x 100 = 30%

If monthly sales increased by $63,000 without any change in fixed cost, monthly net operating income would increase by 63,000 / 20 x 6 = $ 18,900

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