Question
EBook Calculator Margin of Safety and Operating Leverage Medina Company produces a single product. The projected...
eBook Calculator Margin of Safety and Operating Leverage Medina Company produces a single product. The projected income statement for the coming year is as follows: Sales (60,000 units @ $21.00) $1,260,000 Total variable cost 478,800 Contribution margin $ 781,200 Total fixed cost 755,160 Operating income $ 26,040 Required: 1. Compute the break-even sales dollars. 2. Compute the margin of safety in sales dollars 3. Compute the degree of operating leverage! 4. Compute the new operating income if sales are 20% higher than expected.
Answers
Contribution margin ratio = contribution margin/sale contribution margin ratio = 781200/1260000 = 62% 1) break even sales dollars = total fixed cost/contribution margin ratio break even sales dollars = 755160/62% = 1218000 2) margin of safety = sale-break even sale margin of safety = 1260000-1218000 = 42000 3) degree of operating leverage = contribution margin/operating income degree of operating leverage = 781200/26040 = 30 4) operating income = 26040+(26040*20%*30) = 182280
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