S7-13 Compute margin of safety (Learning Objective 5) Given the following inform

Question

S7-13 Compute margin of safety (Learning Objective 5) Given the following information, calculate the margin of safety if the sales double. $100,000 20,000 $80,000 80,000 $0 Sales Less: variable expenses Operating income Compute and use operating leverage factor (Learning Objective 5) Refer to the original data from S7-13, where 1,000 units were sold at the price of $100. If the company sells 1,200 units, what is the operating leverage factor? If the sales volume increases by 10%, by what percentage will the operating income change? S7-14

Explanation / Answer

Operating leverage factor = Contribution Margin/Operating income

Sales = 1200*100 = 120000

Less: Variable expenses = 1200*20000/1000 = 24000

Contribution Margin = 96000

Less: Fixed expenses = 80000

Operating income = 16000 $

Operating leverage factor = 96000/16000 = 6

New sales volume = 1200*1.1 = 1320*100

Sales = 1320*100 = 132000

Less: Variable expenses = 1320*20000/1000 = 26400

Contribution Margin = 105600

Less: Fixed expenses = 80000

Operating income = 25600 $

Percentage operating income change = (25600 - 16000)/16000 = 60%

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