Asked by Brit'Ney McCoy on Jun 09, 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?
Margin of Safety
The difference between actual sales and the break-even point, indicating the amount by which sales can drop before a business incurs a loss.
Degree of Operating Leverage
Degree of operating leverage measures the sensitivity of a company's operating income to a change in sales volume, indicating the impact on profits from sales fluctuations.
- Compute the dollar value and percentage of the margin of safety.
- Comprehend the principle and computation related to the degree of operating leverage.
Verified Answer
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
- Compute the dollar value and percentage of the margin of safety.
- Comprehend the principle and computation related to the degree of operating leverage.
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