Question

before taxes of $3,000 2. Using the formula method, solve for the dollar sales that are required to earn a target profit before taxes of $4,000. 3. Using the formula method, calculate the number of units that need to be sold to earn an after-tax income of $6,000, assuming a tax rate of 25%. EXERCISE 4-7 Compute the Margin of Safety [LO7] Exercise 4-7: Help Me Solve It Tutorial Click here to view a transcript of this video Mohan Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month's budget appear below: Fued expense.. $8500 per month Required: 1. Compute the company's margin of safety. 2. Compute the company's margin of safety as a percentage of its sales. EXERCISE 4-8 Compute and Use the Degree of Operating Leverage [L08] ntergo Company installs home theatre systems. The company's most recent monthly contribution

Answer 1

1) To compute the margin of safety, we must first compute the break- even unit sales
Sales = variable expense + fixed expense + profits
$25Q = $15Q + $8500 + $0
$10Q = $8500
Q = $8500 ÷ $10 per unit
Q= 850 units

Sales( at the budgeted volume of 1000 units )=     $25,000
Break- even sale( at 850 units)                               $21,250
                                  =850 × 25
Margin of safety( in dollars ) =                                 $3,750

2) The margin of safety as a percentage of sale is as follow :
Margin of safety(in dollars) = $3,750
÷ sales   =                                    $25000
Margin of safety as a percentage of sale = 15%