Question

5-8, 5-15, on pages 227 to 231

EXERCISE 5–8 Compute the Margin of Safety LO5–7 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30

Variable expense per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20

Fixed expense per month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,500

Unit sales per month. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000

Required: 1. What is the company’s margin of safety? 2. What is the company’s margin of safety as a percentage of its sales?

EXERCISE 5–15 Operating Leverage LO5–1, LO5–8 Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000 games last year at a selling price of $20 per game. Fixed expenses associated with the game total $182,000 per year, and variable expenses are $6 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor.

Required:

1. Prepare a contribution format income statement for the game last year and compute the degree of operating leverage.

2. Management is confident that the company can sell 18,000 games next year (an increase of 3,000 games, or 20%, over last year). Given this assumption:

a. What is the expected percentage increase in net operating income for next year?

b. What is the expected amount of net operating income for next year? (Do not prepare an income statement; use the degree of operating leverage to compute your answer.)

Answer 1

Exercise 5-8
Computan of CM Ratio
Contribution margin (A) (30-20)	$10.00
Sales (B)	$30.00
Contribution margin ratio (A/BX100)	33%
Computan of BEP in $
Fixed Costs (a)	$7,500.00
Contribution margin ratio (b)	33%
Break Even point in Dollars (a/b)	$22,500.00
Computan of Margin of Safety Ratio
Sales (A) (1000*30)	$30,000.00
Less:- Break Even Sales	$22,500.00
Margin of Safety in Dollars (B)	$7,500.00
Margin of Safety ratio (A/BX100)	25.00%

Excercise 5-15

Computan of Degree of Operating Leverage
Contribution margin (a) (20-6)*15000	$210,000.00
Net Income (b) (210000-182000)	$28,000.00
Degree of Operating Leverage (a/b)	7.50
	times

2(a) &(b) Computation of Expected Amount of Net Operating Amount Expected % of Net Operating Income
	Exisitng	Revised
Sales revenue (18000*20) (15000*20)	$300,000.00	$360,000.00
Variable Cost (18000*6) (15000*6)	$90,000.00	$108,000.00
Contribution margin	$210,000.00	$252,000.00
Fixed Cost	$182,000.00	$182,000.00
Net Income	$28,000.00	$70,000.00

or

Part-2(a) & (b)

% Increase in operating Income = Degree of Operating Leverage X % increase in Sales

=7.5*20%=150%

Expected Amount of Net Operating Income =Existing Income + ( Existing Income X 105%)

=28000+ (28000*150%)=70000