Question

Practicality Partnership provides budgeting and financial investment counseling. The firm earned $500,000 in revenue and incurred $100,000 in variable costs last month. If the firm has $250,000 in fixed costs each month, Last month, what was the firm's margin of safety (in revenue dollars) and degree of operating leverage?

Answers: a. Margin of safety: $312,500; Degree of operating leverage: 2.667 b. Margin of safety: $187,500; Degree of operating leverage: 0.375 c. Margin of safety: $187,500; Degree of operating leverage: 2.667 d. Margin of safety: $312,500; Degree of operating leverage: 0.375

Answer 1

Contribution margin=Sales price-Variable cost

=(500,000-100,000)=$400,000

Contribution margin ratio=Contribution margin/Sales

=(400,000/500,000)=0.8

Breakeven sales=Fixed cost/Contribution margin

=(250,000/0.8)=$312500

Total sales=Breakeven sales+Margin of safety

Margin of safety=(500,000-312500)=187500

Contribution margin	400,000
Less:Fixed cost	250,000
Net operating income	150,000

DOL=Contribution margin/Net operating income

=(400,000/150,000)=2.667(Approx).

Hence the correct option is C.