# Exercise 4-12 target profit and break-even analysis; margin of safety

Exercise 4-12 Target Profit and Break-Even Analysis; Margin of Safety; CM Ratio [LO1, LO3, LO5, LO6, LO7]

Exercise 4-12 Target Profit and Break-Even Analysis; Margin of Safety; CM Ratio [LO1, LO3, LO5, LO6, LO7]

Menlo Company distributes a single product. The company’s sales and expenses for last month follow:

Total Per Unit

Sales $1,092,000 $70

Variable expenses 764,400 49

Contribution margin 327,600 $21

Fixed expenses 264,600

Net operating income $63,000

________________________________________

Requirement 1:

What is the monthly break-even point in units sold and in sales dollars? (Omit the “$” sign in your response.)

Requirement 2:

Without resorting to computations, what is the total contribution margin at the break-even point? (Omit the “$” sign in your response.)

Requirement 3:

How many units would have to be sold each month to earn a target profit of $96,600? Use the formula method.

Units sold units

Requirement 4:

Refer to the original data. Compute the company’s margin of safety in both dollar and percentage terms. (Round your percentage value to 2 decimal places. Omit the “$” and “%” signs in your response.)

Dollars Percentage

Margin of safety $

%

________________________________________

Requirement 5:

What is the company’s CM ratio? If sales increase by $91,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?(Omit the “$” and “%” signs in your response.)

CM ratio %

Increased net operating income $

Problem 4-31 Changes in Fixed and Variable Costs; Target Profit and Break-Even Analysis [LO4, LO5, LO6]

Neptune Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company is anxious to produce and sell. The new toy will sell for $2.9 per unit. Enough capacity exists in the company’s plant to produce 30,900 units of the toy each month. Variable costs to manufacture and sell one unit would be $1.84, and fixed costs associated with the toy would total $48,631 per month.

The company’s Marketing Department predicts that demand for the new toy will exceed the 30,900 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed cost of $2,432 per month. Variable costs in the rented facility would total $2.03 per unit, due to somewhat less efficient operations than in the main plant.

Requirement 1:

(a) Calculate the contribution margin per unit on anything over 30,900 units. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)

Contribution margin $

(b) Compute the total fixed costs to be covered if more than 30,900 units are produced. (Omit the “$” sign in your response)

Total fixed costs to be covered by remaining sales $

(c) Compute the monthly break-even point for the new toy in units and in total sales dollars. (Round your answers to the nearest whole number. Omit the “$” sign in your response.)

Monthly break-even point in unit sales units

Monthly break-even point in dollar sales $

________________________________________

Requirement 2:

How many units must be sold each month to make a monthly profit of $10,962?

Units to be sold units

Requirement 3:

If the sales manager receives a bonus of 20 cents for each unit sold in excess of the break-even point, how many units must be sold each month to earn a return of 21% on the monthly investment in fixed costs? (Round your answer to the nearest whole number.)

Total units to be sold units

Problem 6-15 Comprehensive Problem with Labor Fixed [LO1, LO2, LO3, LO4]

[The following information applies to the questions displayed below.]

Far North Telecom, Ltd., of Ontario, has organized a new division to manufacture and sell specialty cellular telephones. The division’s monthly costs are shown below:

Manufacturing costs:

Variable costs per unit:

Direct materials $88

Variable manufacturing overhead $3

Fixed manufacturing overhead costs (total) $220,400

Selling and administrative costs:

Variable 12% of sales

Fixed (total) $163,000

________________________________________

Far North Telecom regards all of its workers as full-time employees and the company has a long-standing no layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labor costs in its fixed manufacturing overhead. The cellular phones sell for $330 each. During September, the first month of operations, the following activity was recorded:

Units produced 3,800

Units sold 3,000

________________________________________

rev: 02-09-2011

references

Section Break Problem 6-15 Comprehensive Problem with Labor Fixed [LO1, LO2, LO3, LO4]

1.

value:

20.00 points

Problem 6-15 Requirement 1

Requirement 1:

(a) Compute the unit product cost under Absorption costing. (Omit the “$” sign in your response.)

Unit product cost $

(b) Compute the unit product cost under Variable costing. (Omit the “$” sign in your response.)

Unit product cost $

2.

value:

20.00 points

Problem 6-15 Requirement 2

Requirement 2:

Prepare an absorption costing income statement for September.(Input all amounts as positive values. Omit the “$” sign in your response.)

Requirement 3:

Prepare a contribution format income statement for September using variable costing. (Input all amounts as positive values except net operating loss which should be indicated by a minus sign. Omit the “$” sign in your response.)

Requirement 4:

Assume that the company must obtain additional financing in order to continue operations. As a member of top management, would you prefer to rely on the statement in (2) above or in (3) above when meeting with a group of prospective investors?

rev: 02-09-2011

Absorption costing statement

Variable costing statement

Requirement 5:

Reconcile the absorption costing and variable costing net operating incomes in requirement 2 and 3 above. (Negative amounts should be indicated by a minus sign. Omit the “$” sign in your response.)

$ : Fixed manufacturing overhead cost deferred