Question 1

Company A has a higher margin of safety while Company B has a lower margin of safety.Company A would be considered ________ Company B when considering only margin of safety.

Accepted Answer

A higher margin of safety means that a company has a larger buffer before it starts incurring losses. This implies that the company is less risky than the one with a lower margin of safety. Therefore, Company A would be less risky than Company B.

Question 2

Matthew's Fish Fry has a monthly target operating income of $7,200.Variable expenses are 60% of sales and monthly fixed expenses are $1,800.What is Matthew's operating leverage factor at the target level of operating income?

Accepted Answer

B)
Target income 7,200
+ Fixed expense 1,800
9,000
Divided by target Inc.7,200
Operating leverage = 1.25

Question 3

A company's margin of safety can be stated

Accepted Answer

A company's margin of safety can be stated in units or dollars, which gives a dollar amount of sales that can be lost before the company starts losing money. It can also be stated as a percentage of sales, which indicates the percentage of sales that can decline before a company starts incurring losses. Therefore, option D is the best choice.

Question 4

All else being equal,a company with a high operating leverage will have

Accepted Answer

A high operating leverage means that the company has a high proportion of fixed costs to variable costs. This also means that the company's contribution margin ratio (the difference between sales revenue and variable costs, divided by sales revenue) is relatively high. Higher contribution margin ratios indicate that the company can generate more profit from each sale, which can increase profitability. However, a high operating leverage also means that the company has more risk, as fixed costs must still be incurred even if sales decline.

Question 5

Matthew's Fish Fry has a monthly target operating income of $7,200.Variable expenses are 60% of sales and monthly fixed expenses are $1,800.What is the monthly margin of safety in dollars if the business achieves its operating income goal?

Accepted Answer

B)
Monthly fixed expense $1,800
Targeted operating income 7,200
Contribution margin 9,000 divided by
Contribution margin % 40% (1- variable expense of 60%)
Targeted income = 22,500 (11,200 / 40%)
Less Breakeven 4,500 (fixed expense 1,800 / 40% CM)
Margin Safety dollars 18,000

Question 6

A company's margin of safety is computed as

Accepted Answer

Margin of safety is the difference between actual sales and sales at breakeven, i.e. the amount of sales that can be lost before a company starts incurring losses. Therefore, the answer is C, expected sales - sales at breakeven.

Question 7

The lowest possible operating leverage factor for a company is

Accepted Answer

The lowest possible operating leverage factor for a company is +1. This indicates that the company's operating income will change by the same percentage as its sales, meaning there is a direct, proportional relationship between sales and operating income without any leverage effect.

Question 8

Tom's Taxidermy expects to sell 800 units of its specialty preservation product.The managerial accountant reported that manager must sell 400 units of specialty product to breakeven.Compute the margin of safety in units.

Accepted Answer

D)Margin of safety in units: 800 units - 400 units = 400 units

Question 9

A hotel would be an example of a company with high operating leverage.

Accepted Answer

A hotel typically has high fixed costs such as rent, utilities, and staff salaries. As a result, a small change in revenue can have a significant impact on their profitability. This means that hotels have high operating leverage.

Question 10

Hyde's Headphones sells deluxe headphones for $75 each.Unit variable expenses total $45.The breakeven sales in units is 2,400 and budgeted sales in units is 4,200.What is the margin of safety in dollars?

Accepted Answer

B)(4,200 - 2,400)× 75 = $135,000

Question 11

The higher the operating leverage factor,the

Accepted Answer

Operating leverage factor measures the impact of fixed costs on operating income. The higher the operating leverage factor, the greater the impact of volume on operating income. This means that a small change in sales volume will result in a larger change in operating income. Therefore, option B is the correct choice.

Question 12

Moe's Pizza Shop sells a large pizza for $11.50.Unit variable expenses total $5.50.The breakeven sales in units is 5,000 and budgeted sales in units is 9,500.What is the margin of safety in dollars?

Accepted Answer

A)(9,500 - 5,000)× 11.50 = $51,750

Question 13

By multiplying the operating leverage factor by the anticipated percentage change in volume,one can find

Accepted Answer

By multiplying the operating leverage factor by the anticipated percentage change in volume, one can calculate the anticipated change in operating income. This is because the operating leverage factor indicates the percentage change in operating income that results from a percentage change in sales volume, assuming all other factors remain constant. Therefore, multiplying the operating leverage factor by the anticipated percentage change in volume gives us the anticipated change in operating income.

Question 14

All of the following would be considered a company with high operating leverage,except

Accepted Answer

High operating leverage is characteristic of businesses with high fixed costs relative to their variable costs. Retailers typically have lower fixed costs and higher variable costs compared to golf courses, theme parks, and hotels, making them less reliant on operating leverage.

Question 15

To find a firm's operating leverage factor at a given level of sales,you

Accepted Answer

The answer of To find a firm's operating leverage factor...

Question 16

Matthew's Fish Fry has a monthly target operating income of $7,200.Variable expenses are 60% of sales and monthly fixed expenses are $1,800.What is the monthly margin of safety as a percentage of target sales in dollars?

Accepted Answer

C)
Monthly fixed expense $1,800
Targeted operating income 7,200
Contribution margin 9,000 divided by
Contribution margin % 40% (1- variable expense of 60%)
Targeted income = 22,500 (9,000 / 40%)
Less Breakeven 4,500 (fixed expense 1,800 / 40% CM)
Margin Safety dollars 18,000
Margin safety percentage 80.00% (18,000 margin safety/ 22,500 targeted Inc. )

Question 17

The manager at Tom's Taxidermy expects to sell 800 units at $30 each unit.In order for the manager to breakeven,the manager must sell 400 units.What is the margin of safety in dollars?

Accepted Answer

A)
800 units × $30 = $24,000
400 units × $30 = 12,000
Margin of safety in dollars: $24,000 - $12,000 = $12,000 margin of safety

Question 18

Tom's Taxidermy has a monthly target operating income of $25,000.Variable expenses are 75% of sales and monthly fixed expenses are $15,000.What is Tom's operating leverage factor at the target level of operating income?

Accepted Answer

C)
Target income 25,000
+ Fixed expense 15,000
40,000
Divided by target Inc.25,000
Operating leverage = 1.60

Question 19

Total predicted sales (in units)minus total breakeven sales in units divided by total predicted sales (in units)yields

Accepted Answer

The calculation described in the question is used to determine the margin of safety percentage, which measures how much sales can decline before a company reaches its breakeven point. Therefore, the correct answer is D.

Question 20

All else being equal,a company with a low operating leverage will have

Accepted Answer

A company with a low operating leverage typically has higher variable costs and lower fixed costs. This means that their overall costs will decrease as their sales volume decreases. Therefore, a company with a low operating leverage will have less risk since they are not as impacted by changes in sales volume.

Quiz 7: Cost-Volume-Profit Analysis