Clock Company sells a single product. The company\'s sales and expenses for a re

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

Les Variable Expenses    420,000                28

Contribution Margin       180,000                $12

Less fixed expenses        150,000

Net Operating Income      $30,000

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 increase?

Explanation / Answer

a) Break even point in units sold (BEP) = Fixed Expenses/Contribution Margin per unit = 150000/12 = 12500 units

Break even point in sales dollars = BEP (units sold) * selling price per unit = 12500*40 = 500000 $

b) Total Contribution margin at Break even point is equal to the Fixed Expenses

c) Target profit = 18000 $. Based on Contribution Margin method,

No. of units to be sold = (Fixed Expenses + Target Profit)/ Contribution Margin per unit

= (150000+18000)/12 = 14000 units

Contribution Income statement:-

Target Sales ---------------560000-----14000*40$

Variable costs--------------392000-----14000*28$

Contribution margin------168000

Fixed costs-----------------150000

Net operating income-----18000

d) Margin of safety in dollars = Sales - BEP in dollars = 600000 - 500000 = 100000 $

MOF in % = MOF in dollars/Sales = (100000/600000)*100 = 16.67%

e) Contribution Margin Ratio (CMR) = %(Contribution Margin per unit/Selling Price) = (12/40)*100 = 30%

Net operating income increase = Increase in sales * CMR = $ 80000*30% = 24000 $

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