Asked by matthew winter on May 02, 2024
Verified
Sun Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range. Required:
a.What is the margin of safety in dollars?
b.What is the degree of operating leverage?
Operating Leverage
A measure of how sensitive a company's operating income is to a change in revenues, reflecting the ratio of fixed costs to variable costs.
- Comprehend the methods for computing and deciphering the margin of safety in monetary terms and as a proportion of sales figures.
- Comprehend the theory and methodology behind calculating the degree of operating leverage.
Verified Answer
ZK
Zybrea KnightMay 07, 2024
Final Answer :
a.CM ratio = Contribution margin ÷ Sales = $87,500 ÷ $250,000 = 35%
Dollar sales to break even = Fixed expenses ÷ CM ratio = $71,750 ÷ 35% = $205,000
Margin of safety in dollars = Total budgeted (or actual)sales - Break-even sales
= $250,000 − $205,000 = $45,000
b.Degree of operating leverage = Contribution margin ÷ Net operating income
= $87,500 ÷ $15,750 = 5.6
Dollar sales to break even = Fixed expenses ÷ CM ratio = $71,750 ÷ 35% = $205,000
Margin of safety in dollars = Total budgeted (or actual)sales - Break-even sales
= $250,000 − $205,000 = $45,000
b.Degree of operating leverage = Contribution margin ÷ Net operating income
= $87,500 ÷ $15,750 = 5.6
Learning Objectives
- Comprehend the methods for computing and deciphering the margin of safety in monetary terms and as a proportion of sales figures.
- Comprehend the theory and methodology behind calculating the degree of operating leverage.
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