Target Profit and Break-Even Analysis; Margin of Safety; CM Ratio [LO1, LO3, LO5, LO6, LO7] Menlo Company distributes a single product. The company's sales and expenses for last month follow: Total Per Unit Sales $795,000 $50 Variable expenses 556,500 35 Contribution margin 238,500 $15 Fixed expenses 180,000 Net operating income $58,500 ________________________________________ Requirement 1: What is the monthly break-even point in units sold and in sales dollars? (Omit the "$" sign in your response.) Monthly break-even point units Sales $ ________________________________________ Requirement 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 at the break-even point $ Requirement 3: How many units would have to be sold each month to earn a target profit of $85,500? Use the formula method. Units sold units Requirement 4: Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. (Round your percentage value to 2 decimal places. Omit the "$" and "%" signs in your response.) Dollars Percentage Margin of safety $ % ________________________________________ Requirement 5: What is the company's CM ratio? If sales increase by $55,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? (Round your percentage value to nearest whole percent. Round your dollar value to the nearest dollar amount. Omit the "$" and "%" signs in your response.) CM ratio % Increased net operating income $ ________________________________________ Explanation: (1): Profit = Unit CM × Q − Fixed expenses $0 = ($50 − $35) × Q − $180,000 $0 = ($15) × Q − $180,000 $15 Q = $180,000 Q = $180,000 ÷ $15 Q = 12,000 units, or at $50 per unit, $600,000 (2): The contribution margin is $180,000 because the contribution margin is equal to the fixed expenses at the break-even point. (3): (4): Margin of safety in dollar terms: Margin of safety in dollars = Total sales - Break even sales = $795,000 − $600,000 = $195,000 Margin of safety in percentage terms: (5): The CM ratio is 30%. Expected total contribution margin: ($850,000 × 30%) $255,000 Present total contribution margin: ($795,000 × 30%) 238,500 Increased contribution margin $16,500 ________________________________________

Exercise 6-12 Target Profit and Break-Even Analysis; Margin of Safety; CM Ratio [LO1, LO3, LO5, LO6, LO7]

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

	Total	Per Unit
Sales	$795,000	$50
Variable expenses	556,500	35
Contribution margin	238,500	$15
Fixed expenses	180,000
Net operating income	$58,500

 

Requirement 1:

What is the monthly break-even point in units sold and in sales dollars? (Omit the "$" sign in your response.)

Monthly break-even point	units
Sales	$

 

Requirement 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 at the break-even point

$

Requirement 3:

How many units would have to be sold each month to earn a target profit of $85,500? Use the formula method.

Units sold

units

Requirement 4:

Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. (Round your percentage value to 2 decimal places. Omit the "$" and "%" signs in your response.)

	Dollars	Percentage
Margin of safety	$	%

 

Requirement 5:

What is the company's CM ratio? If sales increase by $55,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? (Round your percentage value to nearest whole percent. Round your dollar value to the nearest dollar amount. Omit the "$" and "%" signs in your response.)

CM ratio	%
Increased net operating income	$

Explanation:

(1): 

Profit	=	Unit CM × Q − Fixed expenses
$0	=	($50 − $35) × Q − $180,000
$0	=	($15) × Q − $180,000
$15 Q	=	$180,000
Q	=	$180,000 ÷ $15
Q	=	12,000 units, or at $50 per unit, $600,000

(2):

The contribution margin is $180,000 because the contribution margin is equal to the fixed expenses at the break-even point.

(3):

(4):  
Margin of safety in dollar terms:

Margin of safety in dollars = Total sales - Break even sales

                                     = $795,000 − $600,000 = $195,000

Margin of safety in percentage terms:


(5):

The CM ratio is 30%.

Expected total contribution margin: ($850,000 × 30%)	$255,000
Present total contribution margin: ($795,000 × 30%)	238,500
Increased contribution margin	$16,500