Question

For each question, fill in the blank, and sketch your solution process and any necessary explanations.

The three questions use this case: This month, Candel Gym has sales of $300,000, contribution margin of $90,000, fixed cost of $54,000 and operating profit of $36,000.

Q1. [10% of test] What is the breakeven in sales dollars? $________________________ .

Q2. What is the firm’s current margin of safety ratio to sales [ie., safety ratio]? _____ % [5% of test]

Q3. What is the firm’s operating leverage number? _________ times [5 % of test]

Answer 1

The breakeven in sales dollars

Contribution Margin ratio = [Contribution margin / Sales] x 100

= [$90,000 / $300,000] x 100

= 30.00%

Therefore, the breakeven in sales dollars = Fixed Costs / Contribution Margin ratio

= $54,000 / 0.30

= $180,000

The firm’s current margin of safety ratio to sales

Marin of safety = Actual sales - breakeven in sales dollars

= $300,000 - $180,000

= $120,000

Therefore, the firm’s current margin of safety ratio to sales = [Margin of safety / Actual sales] x 100

= [$120,000 / $300,000] x 100

= 40.00%

The firm’s operating leverage number

The firm’s operating leverage number = Contribution margin / Net Operating Profit

= $90,000 / $36,000

= 2.50 Times