1.James Company has a margin of safety percentage of 20%. The break-even point i
ID: 2415082 • Letter: 1
Question
1.James Company has a margin of safety percentage of 20%. The break-even point is $200,000 and the variable expenses are 45% of sales. Given this information, what is the net operating income?
Answer: 27,500
2.
Tressel Company's variable expenses are 60% of sales. At a $400,000 sales level, the degree of operating leverage is 5. If sales increase by $40,000, the new degree of operating leverage will be (rounded):
a. 3.67
b. 2.86
c. 5.25
d. 5.00
Answer: D
Explanation / Answer
1) Net operating income
Margin of safety = Current sales - Breakeven sales / Current sales
20% = Current sales - $ 200,000 /Current sales
0.20 current sales = Current sales - $ 200,000
0.80 current sales = $ 200,000
Current sales = $ 200,000/ 0.80
Current sales = $ 250,000
Margin of safety in $ = $250,000 - $200,000 = $50,000
Net Operating Income = Margin of safety X (100% - Variable cost) = $ 50,000 X (100% - 45%) = $ 27,500
2) Since the fixed expenses remain same so operaing leverage will remain same at increase sales also so answer is D. 5.00
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