Question

Wally's Repair Shop has a monthly target operating income of $50,000. Variable expenses are 75% of sales and monthly fixed expenses are $11,000 Read the requirements * Requirements Requirement 1. Compute the mo Begin by identifying the formula to Target sales in dollars 1. Compute the monthly margin of safety in dollars if the shop achieves its income goal. 2. Express Wally's margin of safety as a percentage of target sales. 3. What is Wally's operating leverage factor at the target level of operating income? 4. Assume that the company reaches its target. By what percentage will the company's operating income fall if sales volume declines by 12%? (Round intermediate calculations The margin of safety is $ Requirement 2. Express Wally's Done Begin by identifying the formula to Margin of safety in dollars Target sales in dollars Margin of safety percentage (Round the percentage to the nearest whole percent.) The margin of safety percentage is % of target sales.

Answer 1

Targeted Operating Income = $50000

Fixed Expenses = $11000

Variable Expenses = 75% of Sales

Contribution Margin % = 100% - 75% = 25%

Contribution Margin = Fixed Expenses + Operating Income = 50000 + 11000 = $61000

Targeted Sales = Contribution Margin/Contribution Margin% = 61000/25% = $244000

1.Margin of Safety,if Shop achieves its operating Income goal.

Margin of Safety =  Operating Income/Contribution Margin% =50000/25% =$200000

2.Wally's Margin of safety as a percentage of targeted Sales.

% Margin of safety of Targeted Sales = Margin of Safety X 100/Targeted Sales = 200000 X 100/244000

= 81.97% (Approx.)

3. Operating Leverage Factor at the Target Level of Operating Income.

Operating Leverage = Contribution/Operating Income =61000/50000 = 1.22

4. Percentage fall in Income when sales volume declines by 12%.

Sales = 244000 - 12% of 244000 = $214720

Variable Expenses = 75% of 214720 = $161040

Contribution Margin = Sales - Variable Expenses = 214720 - 161040 = $53680

Fixed Expenses (As Above) = $11000

Operating Income =  Contribution Margin - Fixed Expenses = 53680 - 11000 = $42680

Percentage fall in Income = (50000 - 42680) X 100 / 50000 = 14.64%