A Corporation sells its product for $17 per unit. Its variable cost is $10 per unit, and total fixed costs are $800. Assuming next period’s estimated sales are 300, calculate the following amounts:
a. Degree of operating leverage
b. Margin of safety in units
c. Margin of safety in revenues
· Contribution Margin per unit = Sales Price – Variable Cost per Unit = 17- 10 = 7 unit
· Contribution Margin Ratio = Contribution Margin / Sales price = (7/17) * 100= 41.2%
· Break-even in units= fixed costs/ Contribution Margin per unit=800/7=114.3 unit
· Break-even Point in Dollars = fixed costs/ Contribution Margin Ratio= 800/41.2%=1941
· Break even in units= 300+800/7=157 unit
· Break even in dollars = 300+800/41.2%=2670
· Sales = 114.3 units * 17 sales price per unit = 1938+300=2243
c- Margin safety in dollars =sales-Break even sales = 2243-1941=302
· Variable costs = 10 per unit * 114.3 units = 1143
a- Degree of operating leverage=(sales-variable costs) /(sales – variable costs-fixed costs)=(2243-114) / (2243-1143-800) = 3.7
b- Margin of safety in units= Current Sales Units – Breakeven Point=157-114=43 unit