EXERCISE 6–12 Target Profi t 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. . . . . . . . . . . . . . . . . . . . . . . . $450,000 $30 Variable expenses . . . . . . . . . . . . . 180,000 12 Contribution margin . . . . . . . . . . . . 270,000 $18 Fixed expenses. . . . . . . . . . . . . . . . 216,000 Net operating income . . . . . . . . . . . $ 54,000 Required: 1. What is the monthly break-even point in units sold and in sales dollars? 2. Without resorting to computations, what is the total contribution margin at the break-even point? 3. How many units would have to be sold each month to earn a target profi t of $90,000? Use the formula method. Verify your answer by preparing a contribution format income statement at the target sales level4. 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 $50,000 per month and there is no change in fi xed expenses, by how much would you expect monthly net operating income to increase?
EXERCISE 6–12 Target Profi t 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. . . . . . . . . . . . . . . . . . . . . . . . $450,000 $30
Variable expenses . . . . . . . . . . . . . 180,000 12
Contribution margin . . . . . . . . . . . . 270,000 $18
Fixed expenses. . . . . . . . . . . . . . . . 216,000
Net operating income . . . . . . . . . . . $ 54,000
Required:
1. What is the monthly break-even point in units sold and in sales dollars?
2. Without resorting to computations, what is the total contribution margin at the break-even point?
3. How many units would have to be sold each month to earn a target profi t of $90,000? Use the
formula method. Verify your answer by preparing a contribution format income statement at
the target sales level4. 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 $50,000 per month and there is no
change in fi xed expenses, by how much would you expect monthly net operating income to
increase?
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