Question

Harold McWilliams owns and manages a general merchandise store in a rural area of Virginia. Harold sells appliances, clothing, auto parts, and farming equipment, among a wide variety of other types of merchandise. Because of normal seasonal and cyclical fluctuations in the local economy, he knows that his business will also have these fluctuations, and he is planning to use CVP analysis to help him understand how he can expect his profits to change with these fluctuations. Harold has the following information for his most recent year. Cost of goods sold represents the cost paid for the merchandise he sells, while operating costs represent rent, insurance, and salaries, which are entirely fixed. Sales $ 580,000 Cost of merchandise sold 359,600 Contribution margin 220,400 Operating costs 96,520 Operating profit $ 123,880 Required: 1-a. What is Harold’s margin of safety (MOS) in dollars? (Do not round intermediate calculations.) 1-b. What is the margin of safety (MOS) ratio?

(Input your answer as a percentage rounded to 2 decimal places (i.e., 0.1567 = 15.67%).) 3. What is Harold’s margin of safety (in dollars) and operating profit if sales should fall to $510,000? (Do not round intermediate calculations.)

Answer 1

Ans. 1a	Margin of safety =   Operating profit / Contribution margin ratio
		$123,880 / 38%
		$326,000
Ans. 1b	Margin of safety ratio = Margin of safety / Sales * 100
		$326,000 / $580,000 * 100
		56.21%
Ans. 3	Margin of safety =   Operating profit / Contribution margin ratio
		$97,280 / 38%
		$256,000
	*Working Notes:
	*Contribution margin ratio =   Contribution margin / Sales * 100
		$220,400 / $580,000 * 100
		38.00%
	*Calculations of Contribution margin if sales fall to $510,000 :
	Contribution margin = Sales * Contribution margin ratio
	$510,000 * 38%
	$193,800
	*Calculations of Operating profit on this level is :
	Contribution margin	$193,800
	Less: Operating costs	-$96,520
	Operating profit	$97,280