Question

A manufacturer sold 6,340 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. E.g.. 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 = $ Prey 3 of 26 Next >

Answer 1

Contribution Margin = Sales Revenue - Variable cost

= (6340*40) - (6340*24)

= 253,600 - 152,160 = 101,440

Contribution margin ratio = 101,440/253,600 = 40%

Degree of operating leverage = 4

Contribution margin/Net income = 4

101,440/Net income = 4

Net income = 101,440/4 = 25,360

Contribution margin - Fixed cost = 25,360

Fixed cost = 101,440 - 25,360 = 76,080

Breakeven sales = Fixed cost/Contribution margin ratio

= 76,080/40% = 190,200

Margin of Safety = Sales - Breakeven sales

= 253,600 - 190,200

= 63400