Clock Company sells a single product. The company’s sales and expenses for a rec
ID: 2740953 • Letter: C
Question
Clock Company sells a single product. The company’s sales and expenses for a recent month follow: TOTAL PER UNIT Sales $600,000 $40 Less Variable Expenses 420,000 28 Contribution Margin 180,000 $12 Less fixed expenses 150,000 Net Operating Income $ 30,000
Required: a) What is the monthly break-even point in units sold and in sales dollars?
b) Without resorting to computations, what is the total contribution margin at the break even point?
c) How many units would have to be sold each month to earn a minimum target profit of $18,000? Use the contribution margin method. Verify your answer by preparing a contribution income statement at the target level of sales.
d) Refer to the original data. Compute the company’s margin of safety in both dollar and percentage terms.
e) 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 incease?
Explanation / Answer
A. Break even point in units = Fixed cost / contribution per unit
where ; fixed cost = $150,000 , contribution per unit = $12( given)
Break even point in units = 150,000 / 12 = 12500 units
Break even point in sales = 12,500 * 40 (selling price given in the question) = $500,000
B. At breakeven point there is no profit and no loss . Therefore contribution = fixed costs = $150,000
C. Units to be sold to earn a desired level of profit = [ Fixed costs + desired profit ] / Contribution per unit
where , fixed costs = $150,000 , Desired profit = $18,000 , Contribution per unit = $12
Thus, units to be sold to earn a desired level of profit = [ 150,000 + 18,000 ] / 12 = 14000 units
Contribution Income statement
Sales ( 14000 units @ 40 ) = $560,000
Less : Variable Costs(14000 units @ 28) = $392,000
= Contribution margin = $168,000
Less : Fixed Costs = $150,000
= Profit = $18000
E. Contribution margin ratio = Contribution per unit / sales per unit = 12/ 40 = 0.3 or 30%
As the fixed costs remains same at all level of sales thus, when sales increases by $80,000 the monthly net operating income will increase by $80,000 * 30% = $24,000
D. Margin of safety in dollars = Fixed costs / contribution margin ratio
= $150,000 / 30%(computed in E) = $500,000
Margin of safety in % =[ Margin of safety in dollars / sales in dollars ] *100
= [ 500,000 / 560,000 ] *100 = 89.28%
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