Question

E7-34A (similar to) Wally's Repair Shop has a monthly target operating income of $15,000. Variable expenses are 70% of sales, and monthly fixed expenses are $12,000. Read the requirements Requirement 1. Compute the monthly margin of safety in dollars if the shop achieves its income goal. Begin by identifying the formula to compute the margin of safety - Margin of safety in dollars 0 Requirements 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 9%? Print Done Choose from any drop-down list and then click Check Answer.

Answer 1

Ans:

Contribution margin ratio = 1 - variable cost margin

= 1 - 70% = 30%

1. Margin of safety

= Profit / contribution margin ratio

= $15000 / 30%

= $50000

2. Target sales = ( profit + fixed cost) / contribute margin

= ($15000 + $12000) / 30%

= $90000

MOS as % of sales = $50000/90000 = 55.55%

3. Operating leverage factor = contribution / (contribution - fixed cost)

= ($90000*30% ) / ($90000*30% - $12000)

= $27000 / $15000

= 1.80

4. Decline in sales value = 9%

Decline in operating income = 9% * operating leverage

= 9% * 1.8

= 16.20%