Question

Adam's Repair Shop has a monthly target operating income of $12,000. Variable expenses are 70% of sales, and monthly fixed expenses are $9,000. 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. Target sales in dollars Breakeven sales in dollars Margin of safety in dollars = (Round intermediate calculations up to the nearest whole dollar and your final answer to the nearest whole dollar.) The margin of safety is $ Requirements 1. Compute the monthly margin of safety in dollars if the shop achieves its income goal 2. Express Adam's margin of safety as a percentage of target sales, 3. What is Adam'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

Answer 1

Adam's Repair Shop Contribution % 100% - Variable cost % 100% - 70% = 30% Target Operating Inc. = $ 12,000 Requirement 1) Break Even Sales = Fixed Expenses / Contribution % $ 9,000 / 30% $ 30,000 Target Sale: (Fixed Expenses + Target Income) / Contribution% ($ 9000 +$ 12000) / 30% $ 21,000 / 30% $ 70,000 Margin of Safety = Target Sales - Break even Sales $ 70,000 - $ 30,000 $ 40,000 Requirement 2) Margin of Safety % = MOS ($) /Target Sales x 100 $ 40,000 / $ 70,000 x 100 57.14% Requirement 3) Operating Leverage facto Contribution / Operating Income $ 21,000 / $12,000 1.75 times Requirement 4) Change In Operating Inc Op Leverage factor x % change in Sales 1.75 x 9% 15.75%

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