TEXERCISE 5-18 Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio ' L05-1, 9 LO5-3, 9 LO5-5, 2 LO5-6, 9 LO5-7 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: I. 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. How many units would have to be sold each month to attain a target profit of $90,000? Verify your answer by preparing a contribution format income statement at the target sales level. 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 the company can sell more units thereby increasing sales by $50,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? 1. What is the monthly break-even point in unit sales and in dollar sales? Break-Even Point in Unit Sales Formula Profit = Unit CM * Q - Fixed Expenses $0.00 = ($30.00 - $12.00) * Q - $216,000.00 $0.00 = $18.00Q - $216,000.00 $216,000.00 = $18.00Q $216,000.00 / $18.00 = $18.00Q / $18.00 12,000 Units = Q Break-Event Point in Dollar Sales Formula Profit = CM Ratio * Sales - Fixed Expenses $0.00 = $18.00 $30.00 * Sales - $216,000.00 $0.00 = 0.60*Sales - $216,000.00 $216,000.00 = 0.60*Sales $216,000.00 / 0.60 = (0.60*Sales) / 0.60 $360,000.00 = Sales$360,000.00 = Salas 2. without resorting to computations, what is the total contribution margin at hrea keven point? Contribution Margin at BreakEven Point $215,000.00 3. How many units would have to he sold each month to attain a target prot of $90,(X)0.00? Verify your answer by preparing a contribution format income statement at the ta rget sales level. $90,000.00 : [$30.00 31.2.0010 Q $216.000.00 $90,000.00 : $18.00Q $216,000.00 $306.000.00 = $13.00!} $306,000.00 ,1 $10.00 = $10.00t1j01000 1100011101320 Menlo Company Contribution Income Statement Total Sales Variable Expenses Contribution Margin Fixed Expenses Net Operating Income 4. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. Sales [At 15,000 Units] $450,000.00 Break-Even Point [At 12,000 Units] 360,000.00 Margin of Safety 590,000.00 Margin of Safety in Dollars $90,000.00 Sales [At 15,000 Units] 450,000.00 Percentage Margin of Safety 20.00% 5. What is the company's CM ratio? If the company can sell more units thereby increasing sales by $50,000.00 per month and there is no changed in fixed expenses, by how much would you expect monthly net operating income to increase? Amount Percentage Sales $450,000.00 100.00% Variable Expenses 180,000.00 40.00% Contribution Margin $270,000.00 60.00% Sales (Increased by $50K) $500,000.00 Variable Expenses 200,000.00 Contribution Margin 300,000.00 Fixed Expenses 216,000.00 Net Operating Income $84,000.00 Contribution Margin (Increased Sales) $300,000.00 LESS: Original Contribution Margin 270,000.00 Increase in Net Operating Income $30,000.00