Question

Homework: Chapter 20 Homework Score: 0 of 1 pt 6 of 7 (5 complete) E20-34 (similar to) Rodney's Repair Shop has a monthly target profit of $19,500. Variable costs are 75% of sales, and monthly fixed costs are $13,000 Requirements 1. Compute the monthly margin of safety in dollars if the shop achieves its income goal. 2. Express Rodney's margin of safety as a percentage of target sales. 3. Why would Rodney's management want to know the shop's margin of safety? Requirement 1. Compute the monthly margin of safety in dollars if the shop achieves its income goal Select the labels and enter the amounts to compute Rodney's Repair Shop's monthly margin of safety in dollars. Margin of safety in dollars

Answer 1

Answer

• First calculate Break even sales
  >CM Ratio = 100% - 75% = 25%
  >Fixed Cost = $ 13000
  >Break even sales = $ 13000 / 25% = $ 52,000
• Now calculate sales required to attain target profits.
  >Total Contribution margin required = $ 19500 target profit + $ 13000 Fixed cost = $ 32,500
  >Sales Required = $ 32500 / 25% = $ 130,000
• Requirement 1

Total [target] sales	-	Break Even sales dollars	=	margin of Safety in dollars
$130,000	-	$52,000	=	$78,000

• Margin of Safety as % of sales
  = ($ 78000 / $ 130000) = 0.6 = 60%