Exercise 518 BreakEven and Target Profit Analysis Margin of

Exercise 5-18 Break-Even and Target Profit Analysis; Margin of Safety, CM Ratio [LO5-1, LO5-3, Los-5 LO5-6, LO5-7 Menlo Company distributes a single product. The company\'s sales and expenses for last month follow Per Unit $604,000 $40 422,80028 181,200 $12 Total Sales Variable expenses Contribution margin Fixed expenses 147,680 Required: 1. What is the monthly break -even point in unit sales and in dollar sales? 2 Without resorting to computations, what is the total contribution margin at the break-even point? 3-a. How many units would have to be sold each month to attain a target profit of $58.800? 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 $79,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? 1 of 7 Next

Solution

Answer to Part 1.

Break Even Point (in Units) = Fixed Cost / Contribution Margin per unit
Break Even Point (in Units) = 147,600 / 12
Break Even Point (in Units) = 12,300 Units

Break Even Point (in Dollar Sales) = Break Even Point (in Units) * Selling Price per Unit
Break Even Point (in Dollar Sales) = 12,300 * $40
Break Even Point (in Dollar Sales) = $492,000

Answer to Part 2.

At Break Even Point, Contribution Margin is equal to Total Fixed Cost.

Therefore, Contribution Margin at Break Even Point is $147,600.

Answer to Part 3-a.

Profit = Contribution Margin – Fixed Cost
Let the Number of Units sold be “x” units
$58,800 = $12 * x - $147,600
$206,400 = $12 * x
x = 17,200

Therefore, 17,200 units must be sold to attain a target profit of $58,800.

Answer to Part 4.

Margin of Safety (in Dollar) = Current Sales – Break Even Sales
Margin of Safety (in Dollar) = $604,000 - $492,000
Margin of Safety (in Dollar) = $112,000

Margin of Safety (in percentage) = Margin of Safety (in Dollar) / Current Sales * 100
Margin of Safety (in percentage) = 112,000 / 604,000 * 100
Margin of Safety (in percentage) = 18.54%