Clock Company sells a single product. The company’s sales and expenses for a recent month follow:
Sales $600,000 $40
Less Variable Expenses 420,000 28
Contribution Margin 180,000 $12
Less fixed expenses 150,000
Net Operating Income $ 30,000
Required:
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?