4. Refer to the original data. Compute the company\'s margin of safety in both d

Question

4. 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 (i.e .1234 should be entered as 12.34).

5. What is the company’s CM ratio? If monthly sales increase by $70,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

  

5. What is the company’s CM ratio? If monthly sales increase by $70,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Menlo Company distributes a single product. The company's sales and expenses for last month follow: Total 434,000 186,000 Per Unit S 40 28 Sales Variable expenses $620,000 $ 12 Contribution margin Fixed expenses 154,800 Net operating income 31,200 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 units 2. Without resorting to computations, what is the total contribution margin at the break-even point? Total contribution margin 3-a. How many units would have to be sold each month to earn a target profit of $49,200? Use the formula method. Units sold 3-b. Verify your answer by preparing a contribution format income statement at the target sales level Menlo Company Contribution Income Statement Total Per unit

Explanation / Answer

1 Break-even point in unit sales=Fixed expenses/Contribution margin per unit=154800/12=12900 units Break-even point in $ =Fixed expenses/Contribution margin ratio Contribution margin ratio=Contribution margin/Sales=12/40=0.3 Break-even point in $ =154800/0.3=516000 2 Total contribution margin at the break-even point=Fixed expenses=$154800 3-a. Units to be sold to attain target=(Desired profit+Fixed expenses)/Contribution magin per unit=(49200+154800)/12=17000 units 3-b. Contribution income statement Sales (17000*40) 680000 Less: Variable expenses (17000*28) 476000 Contribution margin 204000 Less: Fixed expenses 154800 Net operating income 49200 4 Margin of safety in $=Actual sales-BEP Sales=620000-516000=104000 Margin of safety in %=(Actual sales-BEP sales)/Actual sales=(620000-516000)/620000=16.77% 5 Contribution margin ratio=Contribution margin/Sales=12/40=0.3 Degree of operating leverage=Contribution margin/Operating income=186000/31200=5.96 Increase in sales in %=70000/620000=11.29% Increase in operating income in %=Degree of operating leverage*Increase in sales=5.96*11.29=67.28% Increase in operating income=31200*67.28%=$20991

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