Question

Help Save Exit 3 A manufacturer sold 6,220 units of its product at the price of $40 last year. The variable cost per unit was $24. Their degree of operating leverage was 4. What was the margin of safety (in $) for this company last year? (All answers are whole numbers - unless specified otherwise. You should NOT include the $ sign or a comma. Eg, you should type 1000 for one thousand. Negative numbers should be added with a minus sign, e.g. -1000 for a decrease or loss of one thousand.) Margin of Safety - $ [ 5 points Sa.

Answer 1

Solution: Margin of safety = $ 62200

Calculation of contribution margin

Sales (6,220 units * $40)	$248,800
Less: Variable costs (6,220 units * $24)	$149,280
Contribution Margin	$99,520

Degree of operating leverage = Contribution Margin / Operating Income

4 = $99,520 / Operating Income

Operating Income = $99,520 / 4 = $24,880

Contribution Margin Ratio = Contribution Margin / Sales

= $99,520 / $248,800 = 0.4 or 40%

Margin of safety = Operating Income / Contribution Margin Ratio

= $24,880 / 0.4 = $62200

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