Question

Terry's Towing Service has a monthly target operating income of $30,000. Variable expenses are 40% of sales and monthly fixed expenses are $7,500

1. Compute the monthly margin of safety in dollars if the shop achieves its income goal.
2. Express Terry's margin of safety as a percentage of target sales
3. What is Terry's operating leverage factor at the target level of operating income? 4. Assume that the company reaches its target. By what percentage will the company's operating income fall if sales volume declines by 12%?

Answer 1

Answer:

1. $50,000

2. 80%

3. 1.25

4.  15%

Explanation:

Given that

Target Income  = $30,000

Fixed expenses  = $7,500

Variable cost  = 40% of sale

Contribution margin  = 60% of sale

The computation of given question is below:-

Contribution margin  = Target Income  +  Fixed expenses

= $30,000  + $7,500

= $37,500

Total target Sales Revenue

$37,500 ÷ 60%

= $62,500

Working for Break Even point Sales in dollars

Break Even Sale

= $7,500 ÷ 60%

= $12,500

1. Margin of safety  in dollars

Total Sales Revenue  - Break Even Sales Revenue

=  $62,500  - $12,500

=  $50,000

2. Margin of Safety as a percentage  of target sales

= Margin of safety  in dollars ÷ Total Sales Revenue

= $50,000 ÷ $62,500

= 80%

3. Operating Leverage

= Total Sales Revenue × Contribution margin

= (62,500 × 60%)

= $37,500

Operating Income =  $30,000

Operating leverage = Contribution margin ÷ Operating Income

= 37,500 ÷ 30,000

= 1.25

4. Percentage of the company's operating income will fall if sales volume declines by = 12%

Company's operating income will fall by

(12% × Operating Leverage)

= 12% × 1.25

= 15%

Answer 2

1. The monthly margin of safety in dollars is $50,000.

2. The margin of safety as a percentage of target sales is 80%.

3 The Terry's operating leverage factor is 1.25.

4.  The percentage is 15%.

Given that,

• Target Income  = $30,000 .
• Fixed expenses  = $7,500 .
• Variable cost  = 40% of sale .
• Contribution margin  = 60% of sale.

Based on the above information, the calculation is as follows:

Contribution margin  = Target Income  +  Fixed expenses

= $30,000  + $7,500

= $37,500

Now

Total target Sales Revenue

= $37,500 ÷ 60%

= $62,500

Now

Break-Even point Sales in dollars

= $7,500 ÷ 60%

= $12,500

1. Margin of safety  in dollars

= Total Sales Revenue  - Break Even Sales Revenue

=  $62,500  - $12,500

=  $50,000

2. Margin of Safety as a percentage  of target sales

= Margin of safety  in dollars ÷ Total Sales Revenue

= $50,000 ÷ $62,500

= 80%

3. Operating Leverage

= Total Sales Revenue × Contribution margin

= (62,500 × 60%)

= $37,500

Operating Income =  $30,000

Operating leverage = Contribution margin ÷ Operating Income

= 37,500 ÷ 30,000

= 1.25

4. Percentage is  

The Company's operating income will fall by  (12% × Operating Leverage)

= 12% × 1.25

= 15%

Therefore we can conclude that

1. The monthly margin of safety in dollars is $50,000.

2. The margin of safety as a percentage of target sales is 80%.

3 The Terry's operating leverage factor is 1.25.

4.  The percentage is 15%.

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