Case4 Question Solution

Chapter 4
Case
BSMM 8110 W2023
Break-even, Target Profit Margin of Safety, CM Ratio
Menlo Company distributes a single product. The company’s sales
and expenses for last month:
Total Per Unit
Sales $450,000 $30
Variable Expenses 180,000 12
Contribution Margin $270,000 $18
Fixed Expenses 216.000
Operating Income $54,000
1. What is the monthly break-even point in unit sales and in dollar sales?
2. Without resorting to calculations, what is the total contribution margin at
the break-even point?
3. How many units would have to be sold each month to earn a target profit
of $90,000? Verify your answer by preparing a contribution format
income statement at the target sales level.
4. Refer to Part 3 and now assume that the tax rate is 30%. How many units
would need to be sold each month for an after-tax profit of $90,000?
5. Refer to the original data. Calculate the company’s margin of safety in
both dollar and percentage basis.
6. What is the company’s CM Ratio? If sales increase by $50,000 per month
and there is no change in fixed expenses, by how much would you expect
monthly net operating income to increase?
1. What is the monthly break-even point in unit sales and in dollar
sales?
1. Unit sales to break-even:

Unit sales = Fixed expenses
to break even Unit contribution margin
$216,000
= = 12,000 units
$18
or at $30 per unit, $360,000
2. Without resorting to calculations, what is the total contribution
margin at the break-even point?
2. The contribution margin is $216,000 because
the contribution margin is equal to the fixed
expenses at the break-even point.
3. How many units would have to be sold each month to earn a target
profit of $90,000? Verify your answer by preparing a contribution
format income statement at the target sales level.
3.
3.
Total Unit
Sales (17,000 units × $30 per unit) ....... $510,000 $30
Variable expenses
(17,000 units × $12 per unit) ............. 204,000 12
Contribution margin.............................. 306,000 $18
Fixed expenses .................................... 216,000
Net operating income ........................... $ 90,000
4. Refer to Part 3 and now assume that the tax rate is 30%. How
many units would need to be sold each month for an after-tax profit
of $90,000?
4. Unit sales required to earn an after-tax profit of $90,000

Target after − tax profit
Fixed expenses +
= 1 − Tax Rate
Unit Contribution Margin
$90,000
$216,000 +
= 1 − .3
$18
= 19,143 units ሺroundedሻ
5. Refer to the original data. Calculate the company’s margin of
safety in both dollar and percentage basis.
5. Margin of safety in dollar terms:

Margin of safety = Total sales - Break-even sales
in dollars
= $450,000 - $360,000 = $90,000

Margin of safety in percentage terms:
Margin of safety=Margin of safety in dollars
percentage Total sales
$90,000
= = 20%
$450,000
6. What is the company’s CM Ratio? If sales increase by $50,000 per
month and there is no change in fixed expenses, by how much would
you expect monthly net operating income to increase?
6. The CM ratio is 60%.
Expected total contribution margin: ($500,000 × 60%) .. $300,000

Present total contribution margin: ($450,000 × 60%) ..... 270,000
Increased contribution margin....................................... $ 30,000
Alternative solution:
$50,000 incremental sales × 60% CM ratio = $30,000
Given that the company’s fixed expenses will not change, monthly net
operating income will also increase by $30,000.
Multi-Product Break-Even Analysis
Gogan Company manufactures and sells two products: Basic
and Deluxe. Monthly sales, CM ratios, and the CM per unit for
the two products are shown below, total fixed expense is
$400,000:
Product
Basic Deluxe Total
Sales $600,000 $400,000 $1,000,000
CM Ratio 60% 35% ?
CM per unit $9.00 $11.50 ?
Required:
1. Prepare a contribution format income statement for the company as a
whole.
2. Calculate the overall break-even point in dollars for the company
based on the current sales mix.
3. Calculate the overall break-even point in units for the company based
on the current sales mix.
4. If sales increase by $50,000 per month, by how much would you
expect the operating income to increase? What are your assumptions?
5. If sales increase by 5,000 units per month, by how much would you
expect the operating income to increase? What are your assumptions?
1. Prepare a contribution format income statement for the
company as a whole.
*$500,000 ÷ $1,000,000 = 50%.

2. Calculate the overall break-even point in dollars for the
company based on the current sales mix.
3. Calculate the overall break-even point in units for the
company based on the current sales mix.
3. The break-even point in units for the company as a whole would be:
(1) (2) (3)

(1) X (2)
Current Weighted
Monthly Sales CM per Average CM
Products Sales in Units* Mix** unit Per Unit
Basic 40,000 .767 $9.00 $6.90
Deluxe 12,173 .233 $11.50 2.68
Total 52,173 $9.58
*Basic: $600,000  ($9  .60); Deluxe: $400,000  ($11.50  .35)
**Basic: 40,000  52,173; Deluxe: 12,173  52,173
4. If sales increase by $50,000 per month, by how much would
you expect the operating income to increase? What are your
assumptions?
5. If sales increase by 5,000 units per month, by how much
would you expect the operating income to increase? What are
your assumptions?
5. The additional contribution margin from additional sales of 5,000 units

can be computed as follows:
5,000 units × $9.58 per unit* = $47,900
*weighted average contribution margin from part 3 above.
This answer assumes no change in selling prices, variable costs per unit,
fixed expenses, or sales mix.

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Chapter 4

1. Unit sales to break-even:

4. Unit sales required to earn an after-tax profit of $90,000

5. Margin of safety in dollar terms:

= $450,000 - $360,000 = $90,000

6. The CM ratio is 60%.

Expected total contribution margin: ($500,000 × 60%) .. $300,000

*$500,000 ÷ $1,000,000 = 50%.

(1) (2) (3)

5. The additional contribution margin from additional sales of 5,000 units

*weighted average contribution margin from part 3 above.

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