Menlo Company distributes a single product. The company’s sales and expenses for last month follow: Sales…
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Question “Menlo Company distributes a single product. The company’s sales and expenses for last month follow: Sales…”
Answer
1. Breakeven point
Breakeven point ( units ) = Fixed cost / Contribution per unit
= 75000 / 6 = 12500 Units
Breakeven point ( sales ) = Breakeven units x Selling price per unit
= 12500 x 20 = $ 250000
2. Contribution margin at breakeven point
The sales point at which there is no profit for the business is called the breakeven point. The fixed cost will equal the contribution margin at this point. In this instance:
Contribution margin = $ 75000
3a.Units sold to attain target profit of $
34200
Units sold = (Fixed cost + Targeted profit) / Contribution per Unit
= ( 75000 + 34200 ) / 6
= 109200 / 6 = 18200 Units
3b. Income Statement
Sales | 18200 x 20 | $ 364000 |
Variable costs are less expensive | 18200 x 14. | $ 254800 |
Contribution Margin | 18200x 6 | $ 109200 |
Fixed Costs Less | $ 75000 | |
Net Income | $ 34200 |
4. Margin of Safety
Margin of Safety (in %) = [( Current sales level- Breakeven point)/ Current sales level] x 100
= [(314000-250000)/ 314000] x 100
= 20.38 %
Margin of Safety (in dollars) = Current sales level – Breakeven point
= 314000 – 250000
= $ 64000
Margin of Safety (in units) = Current Sales Unit – Breakeven Units
= 15700 – 12500
= 3200 Units
5. CM Ratio
Contribution margin ratio =(Contribution / Sales) x 100
= ( 94200 / 314000 )x 100
= 30 %
Sales increase = $ 53000
Increase in net profit = 53000×30
= $ 15900
Net profit will rise by $15900 each month if sales grow by $ 53000 per month.
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Conclusion
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