In: Accounting
E7-34A Terry's Towing Service has a monthly target operating income of $30,000. Variable expenses are 40% of sales and monthly fixed expenses are $7,500
1. Compute the monthly margin of safety in dollars if the shop achieves its income goal.
2. Express Terry's margin of safety as a percentage of target sales
3. What is Terry's operating leverage factor at the target level of operating income? 4. Assume that the company reaches its target. By what percentage will the company's operating income fall if sales volume declines by 12%?
Target Income |
$30000 |
(+) Fixed expenses |
$7500 |
Contribution margin |
$37500 |
Variable cost |
40% of sale |
Contribution margin will be |
60% of sale |
Total target Sales Revenue [37500 / 60%] |
$62500 |
Fixed expenses |
$7500 |
Contribution margin ratio |
$60% |
Break Even Sale [7500/60%] |
$12500 |
Total Sales Revenue |
$62500 |
(-) Break Even Sales Revenue |
$12500 |
Margin of Safety in Dollars |
$50000 |
Margin of Safety in Dollars |
$50000 |
Total target Sales Revenue |
$62500 |
Margin of Safety as percentage of target Sale [50000/62500] |
80% |
Contribution margin [62500 x 60%] |
$37500 |
Operating Income [Target Income] |
$30000 |
Operating leverage [37500/30000] |
1.25 |
Sales Volume Declines by |
12% |
Company's operating income will fall by [12% x Operating Leverage] = [12% x 1.25] |
15% |