Hi! I only need the margin of safety ratio, Thanks in advance! Exercise 19-15 (P

Question

Hi! I only need the margin of safety ratio, Thanks in advance!

Exercise 19-15 (Part Level Submission)

Manual
System

Computerized
System

(a)

Degree of Operating Leverage

SHOW SOLUTION

SHOW ANSWER

LINK TO TEXT

(b)

Increase in Net Income

SHOW SOLUTION

SHOW ANSWER

LINK TO TEXT

(c)

Margin of Safety ratio

LINK TO TEXT

Hi! I only need the margin of safety ratio, Thanks in advance!

Exercise 19-15 (Part Level Submission)

Arquitectos Interiores of Juarez, Mexico, is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Alfonso Jiminez, Arquitectos’ owner, is considering replacing the draftsmen with a computerized drafting system. However, before making the change, Alfonso would like to know the consequences of the change, since the volume of business varies significantly from year to year. Shown below are CVP income statements for each alternative.

Manual
System

Computerized
System

Sales $1,643,000 $1,643,000 Variable costs 1,314,400 657,200 Contribution margin 328,600 985,800 Fixed costs 93,886 751,086 Net income $234,714 $234,714 Arquitectos Interiores of Juarez, Mexico, is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Alfonso Jiminez, Arquitectos' owner, is considering replacing the draftsmen with a computerized drafting system. However, before making the change, Alfonso would like to know the consequences of the change, since the volume of business varies significantly from year to year. Shown below are CVP income statements for each alternative.

Explanation / Answer

MOS = Actual Sales Break-even Sales

MOS = (Actual Sales Break-even Sales) / Actual Sales

Margin of Safety can be expressed both in terms of sales units and currency units.

The margin of safety is a measure of risk. It represents the amount of drop in sales which a company can tolerate. Higher the margin of safety, the more the company can withstand fluctuations in sales. A drop in sales greater than margin of safety will cause net loss for the period.

Step 1: Calculation of Contribution Margin Ratio:

Contribution Margin Ratio = Contribution Margin / Total sales

Particulars        Manual               Computarized

(A)Contribution Margin         $328,600            $985,800

(B)Sales                             $1,643,000         $1,643,000

Contribution Margin Ratio    20%                     60%

Step 2: Calculation of Break -even sales

Break - even point in sales($) = Fixed cost / Contribution Margin Ratio

S.No    Particulars    Manual          Computerized

   1       Fixed cost                $93,886            $751,086

2        Contribution Margin Ratio                20%                 60%

Break -even sales (1/2)                       $469,430              $1,251,810

Step 3: MOS = (Actual Sales Break-even Sales) / Actual Sales

Particulars                           Manual                          Computarized

Actual sales                    $1,643,000                            $1,643,000

Break -even sales        $469,430        $1,251,810

       MOS                    0.7142 or 71.42%                     0.2380 or 23.8%

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