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