Question

Repair Shop has a monthly target operating income of 34000 . Variable expenses are 80 ​% of sales and monthly fixed expenses are 10300 . Requirements 1. Compute the monthly margin of safety in dollars if the shop achieves its income goal. 2. Express Repair​ Shop's margin of safety as a percentage of target sales. 3. What is Repair​ Shop's operating leverage factor at the target level of operating​ income? 4. Assume that the repair shop reaches its target. By what percentage will Repair​ Shop's operating income fall if sales volume declines by ​%? Requirement 1. Compute the monthly margin of safety in dollars if the shop achieves its income goal. Begin by identifying the formula to compute the margin of safety. - = Margin of safety in dollars The margin of safety is ​$ nothing. ​(Round interim calculations up to the nearest whole dollar and your final answer up to the nearest whole​ dollar.) Requirement 2. Express Repair​ Shop's margin of safety as a percentage of target sales. Begin by identifying the formula to compute the margin of safety as a percentage of target sales. / = Margin of safety percentage The margin of safety percentage is nothing​% of target sales. ​(Round your answer to the nearest whole​ percent.) Requirement 3. What is Repair​ Shop's operating leverage factor at the target level of operating​ income? Begin by identifying the formula to compute the operating leverage factor at the target level of operating income. / = Operating leverage factor The operating leverage factor is nothing. ​(Round your answer to two decimal​ places.) Requirement 4. Assume that the repair shop reaches its target. By what percentage will Repair​ Shop's operating income fall if sales volume declines by ​%? ​(Round your answer to two decimal​ places.) Based upon the operating leverage​ factor, if volume decreases by13 ​%, operating income will decrease by nothing​%.

Answer 1

Question 1

Contribution Margin Ratio = 100% - Variable Expenses Ratio

Contribution Margin Ratio = 100% - 80%

Contribution Margin Ratio = 20%

Break Even Point in Dollars = Fixed Costs / Contribution Margin Ratio

= 10,300 / 20%

= $ 51,500

Target Sales on Profit Level of $ 34,000 = (Fixed Costs + Target Profit) / Contribution Margin Ratio

Contribution Margin Ratio = 20%

Fixed Costs = $ 10,300

Target Profit = $ 34,000

Target Sales = (10,300 + 34,000)/20%

= 44,300 / 20%

= 221,500

Margin of Safety Sales = Target Sales - Break Even Sales

= 221,500 - 51,500

= $ 170,000

Question 2

Margin of Safety Sales as a percentage of Total Sales = Margin of Safety Sales / Target Sales * 100

Target Sales = $ 221,500

Margin of Safety Sales = $ 51,500

Margin of Safety Sales % = 51,500 / 221,500 * 100

Margin of Safety Sales % = 23.25%

Question 3

Operating Leverage Factor at Target Level of Income = Contribution Margin at Target Level of Income / Operating Income at Target Level of Income

Contribution Margin = Target Sales * Contribution Margin Ratio

= 221,500 * 20%

= $ 44,300

Operating Income = $ 34,000

Operating Leverage Factor = 44,300 / 34,000

Operating Leverage Factor = 1.30 Times

Question 4

Operating Leverage Factor = % Change in Operating Income / % Change in Sales Volume

Operating Leverage Factor = 1.30

% Change in Sales = 13%

1.30 = % Change in Operating Income / 13%

% Change in Operating Income = 1.30 * 13%

% Change in Operating Income = 16.94%

Operating Income Decrease by 16.94% if Sales Volume decreasese by 13%.