Question

Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month’s budget appear below:

Selling price per unit	$	29
Variable expense per unit	$	13
Fixed expense per month	$	13,600
Unit sales per month		1,000

Required:

1. What is the company’s margin of safety? (Do not round intermediate calculations.)

2. What is the company’s margin of safety as a percentage of its sales? (Round your percentage answer to 2 decimal places (i.e. .1234 should be entered as 12.34).)

.

Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows:

	Amount			Percent of Sales
Sales	$	122,000		100	%
Variable expenses		48,800		40	%
Contribution margin		73,200		60	%
Fixed expenses		18,000
Net operating income	$	55,200

Required:

1. What is the company’s degree of operating leverage?

2. Using the degree of operating leverage, estimate the impact on net operating income of a 19% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 19% increase in sales.

Answer 1

Margin of Safety

Step 1- Calculating Break Even Point

Formula

BEP = F.C /(Sales Price Per Unit- V.C)

13600/(29-13)

13600/16

= 850 units

Step -2 Calculating Margin of safety

Formula

Margin of safety = Actual Sales- BEP

1000-850

=150 units

This means the sales is 150 units well and above the Break even level.

Margin of safety as a percentage of its sales

(Current Sales level-BEP)/Current sale level

(1000-850)/1000*100

150/1000*100

=15%

Degree of operating Leverage

Formula

DOL =(Sales-Variable costs)/(Sales-Variable Costs-fixed costs)

= (122000-48800)/122000-48800-18000)

=73200/55200

=1.33

If 19% Sales increase Means.

Formula

DOL=Change in operating income/change in sales

=                      13908/23180

= 0.6

Contribution Format Income Statement If Sales increase 19%

Sales = 145180

Variable Exp= 58072

Contribution Margin= 87108

Fixed Exp= 18000

Net Operating Income= 69108