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.
Related questions
Sun Corporation Has Provided the Following Contribution Format Income Statement ...
The Degree of Operating Leverage Is Closest To
What Is the Margin of Safety in Dollars
Lofft Corporation Has Provided the Following Contribution Format Income Statement ...
If the Degree of Operating Leverage Is 4, Then a ...