Margin of Safety and Operating Leverage Medina Company produces a single product

Question

Margin of Safety and Operating Leverage

Medina Company produces a single product. The projected income statement for the coming year is as follows:

Required:

1. Compute the break-even sales dollars.
$

2. Compute the margin of safety in sales dollars.
$

3. Compute the degree of operating leverage.

4. Compute the new operating income if sales are 20% higher than expected.
$

Sales (68,000 units @ $17.00) $1,156,000 Total variable cost 323,680 Contribution margin $ 832,320 Total fixed cost 807,840 Operating income $ 24,480

Explanation / Answer

Contribution margin ratio = 832320/1156000= 72% 1 Break-even sales = Total fixed cost /CM ratio = 807840/72%= 1122000 2 Margin of safety=1156000-1122000= 34000 3 Degree of operating leverage=Contribution margin /Operating income = 832320/24480= 34 4 New operating income = 24480+(24480*20%*34)= 190944

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