EXERCISE 5-11 Break-Even Analysis; Target Profit; Margin of Safety: CM Ratio LO1

Question

EXERCISE 5-11 Break-Even Analysis; Target Profit; Margin of Safety: CM Ratio LO1, LO3, LO5, LO6, LO7) Pringle Company distributes a single product. The company's sales and expenses for a recent month follow Total Per Unit Sales Variable expenses Contribution margin Fixed expenses Net operating income $600,000 $40 28 20,000 180,000 $12 50,000 _ 30,000 216 Chapter 5 Required: . 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 profit of $18,000? Use the formula method. Verify your answer by preparing a c the target level of sales Refer to the original data. Compute the company's margin of safety in both dollar and per- centage terms. What is the company's CM ratio? If monthly sales increase by $80,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? income statement at 4. 5.

Explanation / Answer

Req 1: CM ratio: Contribution per unit/ Sselling price *100 12 /40 *100 = 30% Break even in units: Fixed cost / CM per unit 150000 /12 = 12500 units Break even in $: Fixed cost / Cm ratio *100 150000 /30% = $500,000 Req 2: Contribution at Break even = 150,000 (i.e. equal to Fixed cost) Req 3: Target Profit: 18000 Target contirbution: 150000+18000 = 168000 Target sales in units: Target contribution / CM per unit 168000 /12 = 14000 units Req 4: Margin of Safety: Nnet income / CM ratio 30000 /30% =$ 100,000 Margin of safety % of sales: 100000/600,000 *100 =16.67% Req 5: CM ratio: Contribution per unit/ Sselling price *100 12 /40 *100 = 30% Additional sales: 80000 Additional contirbution @30% 24000 Additional fixed cost 0 Increase in Net income 24000

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