Lydia Company has the following information. What are Lydia's degree of operating leverage and margin of safety ratio?

Sales $1,600,000

Fixed costs 160,000

Variable costs 1,120,000

А Degree of operating leverage 1.5 Margin of safety ratio .67

B Degree of operating leverage .67 Margin of safety ratio 2.0

C Degree of operating leverage .30 Margin of safety ratio .67

D Degree of operating leverage .30 Margin of safety ratio .20

Solutions

Expert Solution

Answer : A

>> Contribution margin =Sales - Variable cost

>> Contribution margin = $ 1,600,000 - $ 1,120,000

>> Contribution margin = $ 480,000.

>> Profit = Contribution margin - Fixed cost

>> Profit = $ 480,000 - $ 160,000

>> Profit = $ 320,000.

>> Degree of Operating Leverage = Contribution Margin / Profit

>> Degree of Operating Leverage = $ 480,000 / $ 320,000

>> Degree of Operating Leverage = 1.5.

>> Contribution margin ratio = $ 480,000 / $ 1,600,000

>> Contribution margin ratio = 30 %.

>> Break even sales = Fixed cost / CM Ratio

>> Break even sales = $ 160,000 / 30 %

>> Break even sales = $ 533,333.

>> Margin of safety = Actual sales - Break even sales

>> Margin of safety = $ 1,600,000 - $ 533,333

>> Margin of safety = $ 1,066,667.

>> Margin of safety ratio = $ 1,066,667 / $ 1,600,000

>> Margin of safety ratio = 0.67

ekkarill92 answered 1 year ago

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