Question

In: Accounting

Harold McWilliams owns and manages a general merchandise store in a rural area of Virginia. Harold...

Harold McWilliams owns and manages a general merchandise store in a rural area of Virginia. Harold sells appliances, clothing, auto parts, and farming equipment, among a wide variety of other types of merchandise. Because of normal seasonal and cyclical fluctuations in the local economy, he knows that his business will also have these fluctuations, and he is planning to use CVP analysis to help him understand how he can expect his profits to change with these fluctuations. Harold has the following information for his most recent year. Cost of goods sold represents the cost paid for the merchandise he sells, while operating costs represent rent, insurance, and salaries, which are entirely fixed.
Sales $ 760,000
Cost of merchandise sold 433,200
Contribution margin 326,800
Operating costs 151,790
Operating profit $ 175,010

Required:

1-a. What is Harold’s margin of safety (MOS) in dollars? (Do not round intermediate calculations.)

1-b. What is the margin of safety (MOS) ratio? (Input your answer as a percentage rounded to 2 decimal places (i.e., 0.1567 = 15.67%).)

3. What is Harold’s margin of safety (in dollars) and operating profit if sales should fall to $645,000? (Do not round intermediate calculations.)

Solutions

Expert Solution

Answer:

1a.) margin of safety (MOS) in dollars?

Contribution margin ratio = $326,800/$760000 = 43%

Break even sales = Fixed cost/contribution margin

                            =$151,790/43% = $353,000

Margin of safety = Actual sales - Break even sales = $760,000 - $353,000 = $407,000

1b. margin of safety (MOS) ratio?

Margin of safety/Actual sales = $407,000/$760,000

                                                 = 53.55%

3

  • .if sales falls to $645,000 there is no change in contribution margin because we should not incur variable cost for falls in sales
  • So there is no change in break even sales because no change in fixed cost and contribution margin
  • So Margin of safety = Actual sales - Break even sales = $645,000 - $353,000 = $292,000

3b. Operating profit:

Contribution margin (43% x $645,000)

277,350

Less: Operating costs

(151,790)

Operating profit

125,560

ekkarill92 answered 4 hours ago
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