Exercise 5-18 Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio

Question

Exercise 5-18 Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio [LO5-1, LO5-3, LO5-5, LO5-6, LO5-7]

         

         

         

         

Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

         

What is the company’s CM ratio? If monthly sales increase by $81,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

        

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

Explanation / Answer

1.

break even point:

in units:

CM % ratio: 6/20 = .3

sale required = 72600/.3 = 242000

in units = 242000/20 = 12100 units.

in dollar = $ 242000

2.

contribution magin is equal to fixed cost at break even point:

$72600

3a.

target profit is $30000

contribution required = 30000+72600 = 102600

sale required in units = 102600/6 = 17100

3b.

verification

sale 17100*20 342000

variable cost 17100*14 239400

contribution 102600

fixed cost 72600

profit 30000

4.

margin of saftey

sale - break even sale

308000- 242000 = $66000

in % = 66000/308000 = 21.43%

5.

CM ratio will be same as sale price and variable cost is same.

CM ratio will be 30%

net income will be increased by 81000*.3 = $24300

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