NN 734-936-0100 FMLA 1(800)713-7384 http://eto.mheducation.com/hmtp t View Favon

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NN 734-936-0100 FMLA 1(800)713-7384 http://eto.mheducation.com/hmtp t View Favonites Tools Help SN.com, Hotmal Outi D Suggested Snes Outlook WebApp n0 Notifications-ADPESA 3rd party ESH Exercise 5-18 Break-Even and Target Profit Analysis, Margin of Safety. CM Ratio [LO51, LO5 3, LO55, L05 Menlo Company distributes a single product The company's sales and expenses for last month follow Per Unit Sales Variable expenses Total $608,000 40 425,600 28 Contribution margin Flxed expenses 182,400 12 145.200 = Net operating income 37.200 Required: 1. What is the monthly break-even point in unit sales and in dollar sales? Break-even point in unit sales Break even point in sales dollars 2 Without resorting to computasions, what is the total contribution margin at the break-even point? 3-a How many units would have to be sold each month to eam a target proft of 56-4,0007 Use the formuía method Uinits sold W N

Explanation / Answer

Req 1: CM ratio: Contribution per unit/ Selling price 12 /40 *100 = 30% Break even in units: fixed cost / Cm per unit ($ 145200 /12) = 12100 units Break even in $: Fixed cost / CM ratio ( 145200 / 30%) = $ 484000 Break evn units 12100 units Break even in $ $484,000 Req 2: Contribution Margin at break even is always equal to Fixed cost Contribution Margin    145200 Req 3: Desired profits: 64000 Desired contribtuion: 145200 +64000 = $209,200 Required units to be sold: Desired contribution/ Cm per unit (209200 /12) = 17434 units Unit sold 17434 units Req 3-b Sales revenue (17434 units @$40) 697360 Less: variable cost (17434*28) 488152 Contribution margin 209208 Less: Fixed cost. 145200 Net operating income 64008 Req 4: Margin of safety: Net operating income/ CM per unit = $ 37200/12 = 3100 units Margin of safety in $: Net income/ CM ratio = $ 37200 /30% = $124000 Margin of Safety in %: 124000/608000*100= 20.39% margin of safety $124,000 20.39% Req 5: Sales increase: $ 83000 CM ratio: 30% Contribution earned: $83000*30% = $24900 Additional fixed cost: Nil Net operating income increase: 24900 CM ratio 30% Net income increase 24900

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