Cost-Volume-Profit
Menlo Company manufactures and sells a single product. The company’s sales and expenses
for last quarter follow:
Total
Sales
Per Unit
CM Ratio
$750,000
$50
1.00
Variable manufacturing costs
360,000
24
0.48
Variable selling costs
120,000
8
0.16
270,000
$18
0.36
Less:
Contribution margin
Less:
Fixed manufacturing costs
110,000
Fixed selling and admin costs
106,000
Net income
$54,000
1. What is the quarterly break-even point in units sold and in sales dollars?
Units:
Equation approach:
Sales = Profit + VC + FC
50Q = 0 + 32Q + 216,000
18Q = 216,000
Q = 12,000 units
Contribution Margin approach:
Q = Fixed costs / CM
Q = 216,000 / 18
Q = 12,000 units
Dollars:
Equation approach:
Sales = Profit + VC + FC
S = 0 + 0.64S + 216,000
0.36S = 216,000
S = $600,000
Contribution Margin Ratio approach:
S = Fixed costs / CM Ratio
S = 216,000 / 0.36
S = $600,000
2. How many units would have to be sold each quarter to earn a target profit of $20,000?
Units:
Equation approach:
Sales = Profit + VC + FC
50Q = 20,000 + 32Q + 216,000
18Q = 236,000
Q = 13,111.1 units, therefore 13,112 would need to be sold to make at least $20,000 in
profit
Contribution Margin approach:
Q = (Fixed costs + Profit) / CM
Q = (216,000 + 20,000) / 18
Q = 13,111.1 units, so 13,112
3. If sales increase by $75,000 per quarter and there is no change in fixed expenses, by how
much would you expect quarterly net income to increase?
 Profit =  CM +  FC
= $75,000 x 0.36
= $27,000
There is no change to fixed costs, so nothing is adjusted for this. The change in contribution
margin, in this example, is found by taking the increase in sales multiplied by the contribution
margin ratio. For every one dollar increase in sales, contribution margin increased by $0.36.
This goes towards covering fixed expenses and profits. With no change to fixed expenses,
the full impact is to profit.