Total Per Unit Sales $ 624,000 $ 40 Variable expenses 436,800 28 Contribution margin 187,200 $ 12 Fixed expenses 152,400 Net operating income $ 34,800 Required: 1. What is the monthly break-even point in unit sales and in dollar sales? 2. Without resorting to computations, what is the total contribution margin at the break-even point? 3-a. How many units would have to be sold each month to attain a target profit of $56,400? 3-b. Verify your answer by preparing a contribution format income statement at the target sales level. 4. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. 5. What is the company’s CM ratio? If the company can sell more units thereby increasing sales by $94,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

See explanation

Explanation:

1. What is the monthly break-even point in unit sales and in dollar sales?

Break even point in unit sales:

= Fixed expenses/Unit Contribution margin

= 152,400/12

= 12,700 units

Break even point in dollar sales will be:

= 152,400×40/12

= $508,000

2. Without resorting to computations, what is the total contribution margin at the break-even point?

Total contribution margin at the break even point will be the unit Contribution margin multiplied by the break even point in units

= 12× $12,700

= $152,400

3-a. How many units would have to be sold each month to attain a target profit of $56,400?

Sales in units:

= ($152,400+$56400)/12

= $208800/12

= 17400

b. Verify your answer by preparing a contribution format income statement at the target sales level.

Sales (17400×40) = $696,000

Less: Variable expenses (17400×28) = $487,200

Contribution margin = $208,800

Less: Fixed expenses =$152,400

Net operating income = $56,400

Since net operating income is also $56,400, the answer has been verified.

4. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms.

Margin of safety in dollars will be:

= Sales - Break even sales

= 624,000-508,000

= $116,000

Percentage of Margin of safety:

= 116,000/624,000

= 0.1859

= 18.59%

5. What is the company’s CM ratio? If the company can sell more units thereby increasing sales by $94,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

CM ratio will be the unit Contribution margin divided by the sales per unit. This will be:

= 12÷40

= 0.30

= 30%

Increase in sales = $94000

New sales:

= Sales + Increase in sales

= $624,000+$94,000

= $718,000

New Contribution margin:

= 718000×30%

= 718000 × 0.3

= $215400

New Net operating income:

= 215400-152,400

= $63000

Increase in net operating income

= $63000 - $34800

= $28200

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