The section of Waterways that produces controllers for the company provided the

Question

The section of Waterways that produces controllers for the company provided the following information.

Using this information for the controllers, determine the degree of operating leverage and the margin of safety ratio for Waterways Corporation on this product.

Sales for month of February 4,000 Variable manufacturing cost per unit $9.75 Sales price per unit $42.50 Fixed manufacturing overhead cost (per month for controllers) $81,000 Variable selling and administrative expenses per unit $3.00 Fixed selling and administrative expenses (per month for controllers) $13,122

Explanation / Answer

a)Degree of operating leverage =Contribution margin /net income

                                                        = 119000 / 24878

                                                        = 4.7833

b)contribution margin ratio = 119000 / 170000 = .70 or 70%

Break even point sales = Fixed cost /CM ratio

                                       = 94122 / .7

                                        = 134460

Margin of safety sales = actual sales -BEP sales

                               = 170000 - 134460

                                 = 35540

MOS ratio = margin sales /Actual sales

                        = 35540 / 170000

                        = .2091 or 20.91%

sales    (4000* 42.5) 170000 less:Variable manufacturing cost (9.75 * 4000) - 39000 Variable selling    (3 *4000 ) - 12000 contribution margin 119000 less:Fixed cost    (81000 + 13122 ) - 94122 net income 24878

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