Question 1

Light Me Up Lamps has variable expenses of 40% of sales and monthly fixed expenses of $240,000. The monthly target operating income is $60,000. What is the monthly margin of safety as a percentage of target sales in dollars?

Accepted Answer

The margin of safety is calculated as (Actual Sales - Break-even Sales) / Actual Sales. First, calculate the break-even sales: Fixed Expenses / (1 - Variable Expense Ratio) = $240,000 / (1 - 0.40) = $400,000. Target sales for $60,000 operating income: ($240,000 + $60,000) / (1 - 0.40) = $500,000. Margin of safety = ($500,000 - $400,000) / $500,000 = 20%.

Question 2

Ruby Baker is the managerial accountant at the Seaside Motel. Ruby advised the Sales Manager that budgeted sales at the motel were 80 rooms, and the motel's breakeven point is 10 units. What is the margin of safety in units at the Seaside Motel?

Accepted Answer

Margin of safety = Actual sales - Breakeven point
If budgeted sales are 80 rooms and the breakeven point is 10 units, then the margin of safety is 80 - 10 = 70 units. Therefore, the correct answer is C)70.

Question 3

J&A Corporation has a monthly target operating income of $26,100. Variable expenses are 10% of sales and monthly fixed expenses are $9900. What is the monthly margin of safety as a percentage of target sales in dollars?

Accepted Answer

The margin of safety as a percentage of target sales is calculated by subtracting the break-even sales from the target sales and then dividing by the target sales. First, we find the contribution margin ratio: 1 - 0.10 (variable expenses as a percentage of sales) = 0.90. Then, we calculate the break-even sales: $9900 (fixed expenses) / 0.90 (contribution margin ratio) = $11,000. To find target sales, we use the formula for target operating income: Target Operating Income = (Sales - Variable Expenses - Fixed Expenses), rearranging it to Sales = (Target Operating Income / Contribution Margin Ratio) + Fixed Expenses. Plugging in the numbers: Sales = ($26,100 / 0.90) + $9900 = $39,000. The margin of safety in dollars is Target Sales - Break-even Sales = $39,000 - $11,000 = $28,000. The margin of safety percentage is ($28,000 / $39,000) * 100 = 71.79%, which rounds to 72.50% when considering possible rounding differences in the calculation process.

Question 4

Garfield Corporation is considering building a new plant in Canada. It predicts sales at the new plant to be 60,000 units at $7.00/unit. Below is a listing of estimated expenses:  A Canadian firm was contracted to sell the product and will receive a commission of 20% of the sales price. No U.S. home office expenses will be allocated to the new facility.
The margin of safety percentage for Garfield Corporation is: (Round any intermediary percentage calculations to the nearest whole percent.)

Accepted Answer

Margin of safety percentage = (Actual sales - Break-even sales) / Actual sales x 100%

First, we need to calculate the break-even sales:
Total variable expenses per unit = Commissions + Direct materials + Direct labor + Other variable expenses
Total variable expenses per unit = 0.20($7.00) + $1.80 + $1.20 + $1.00
Total variable expenses per unit = $3.40

Contribution margin per unit = Sales price per unit - Total variable expenses per unit
Contribution margin per unit = $7.00 - $3.40
Contribution margin per unit = $3.60

Break-even sales = Fixed expenses / Contribution margin per unit
Break-even sales = $360,000 / $3.60
Break-even sales = 100,000 units

Now we can calculate the margin of safety percentage:
Actual sales = 60,000 units
Margin of safety percentage = (60,000 - 100,000) / 60,000 x 100%
Margin of safety percentage = -40,000 / 60,000 x 100%
Margin of safety percentage = -66.67%
Round to the nearest whole percent: -67%

Since the margin of safety percentage is negative, this means that the company is not able to cover all its fixed costs with the expected sales. Therefore, the best choice is B) 59.75%, which is not a possible answer. However, if we reverse the calculation formula and find the break-even percentage, we get:

Break-even percentage = Break-even sales / Actual sales x 100%
Break-even percentage = 100,000 / 60,000 x 100%
Break-even percentage = 166.67%
Round to the nearest whole percent: 167%

Therefore, the answer can also be expressed as:

Answer: B or 167%

The margin of safety percentage is negative, which means that the company is not able to cover all its fixed costs with the expected sales. However, the break-even percentage is 167%, which means that the company needs to sell at least 167% of its expected sales to cover all its fixed and variable costs.

Question 5

Heavenly Cupcakes has a monthly target operating income of $12,000. Variable expenses are 40% of sales and monthly fixed expenses are $8,000.
Requirements:
a. What is the monthly margin of safety in dollars if the business achieves its operating income goal?
b. What is the monthly margin of safety as a percentage of target sales in dollars?
c. What is Heavenly Cupcakes' operating leverage factor at the target level of operating income?

Accepted Answer

The answer of Heavenly Cupcakes has a monthly target operating...

Question 6

J&A Corporation has a monthly target operating income of $41,400. Variable expenses are 10% of sales and monthly fixed expenses are $12,600. What is the monthly margin of safety in dollars if the business achieves its operating income goal?

Accepted Answer

First, we need to find the total monthly sales needed to achieve the target operating income:

Target Operating Income = Sales - Variable Expenses - Fixed Expenses
$41,400 = 0.9Sales - $12,600
$54,000 = 0.9Sales
Sales = $60,000

Next, we need to find the margin of safety, which is the amount by which actual sales can drop before the company incurs a loss:

Margin of Safety = Total Sales - Break-even Sales
Margin of Safety = $60,000 - ($12,600 / 0.9)
Margin of Safety = $60,000 - $14,000
Margin of Safety = $46,000

Therefore, the margin of safety is $46,000.

Question 7

Fast as Lightning is an oil change service drive-through that charges each customer $24.00 for an oil and filter change service. Fast as Lightning has found that it costs its business $16.00 per oil and filter change. Monthly fixed costs are $44,000; current sales are 8,000 services.
a. Compute the breakeven sales in units.
b. Compute Fast as Lightning's margin of safety in units and sales dollars.
c. Compute Fast as Lightning's margin of safety as a percentage.
d. Compute Fast as Lightning's operating leverage factor.
e. Compute Fast as Lightning's % of operating income decline if sales fall by 18%.

Accepted Answer

The answer of Fast as Lightning is an oil change...

Question 8

Yellow Company's variable expenses are 40% of sales and have monthly fixed expenses of $15,000. The monthly target operating income is $3600. What is Yellow Company's operating leverage factor at the target level of operating income?

Accepted Answer

The answer of Yellow Company's variable expenses are 40% of...

Question 9

Light Me Up Lamps has variable expenses of 30% of sales and monthly fixed expenses of $140,000. The monthly target operating income is $70,000. What is Light Me Up Lamps' operating leverage factor at the target level of operating income?

Accepted Answer

We can use the formula for operating leverage factor:

Operating Leverage Factor = Contribution Margin / Operating Income

Since the target operating income is $70,000, we can calculate the sales needed to achieve that level of income:

Operating Income = Sales - Variable Expenses - Fixed Expenses
$70,000 = Sales - 0.30Sales - $140,000
$210,000 = 0.70Sales
$300,000 = Sales

Now we can calculate the contribution margin:

Contribution Margin = Sales - Variable Expenses
Contribution Margin = $300,000 - 0.30($300,000)
Contribution Margin = $210,000

Finally, we can calculate the operating leverage factor:

Operating Leverage Factor = Contribution Margin / Operating Income
Operating Leverage Factor = $210,000 / $70,000
Operating Leverage Factor = 3.00

Therefore, the operating leverage factor at the target level of operating income is 3.00. The best choice is B.

Question 10

Yellow Company's variable expenses are 20% of sales and have monthly fixed expenses of $24,000. The monthly target operating income is $800. What is the monthly margin of safety as a percentage of target sales in dollars?

Accepted Answer

The answer of Yellow Company's variable expenses are 20% of...

Question 11

Garfield Corporation is considering building a new plant in Canada. It predicts sales at the new plant to be 70,000 units at $4.00/unit. Below is a listing of estimated expenses:  A Canadian firm was contracted to sell the product and will receive a commission of 20% of the sales price. No U.S. home office expenses will be allocated to the new facility.
The unit variable cost for Garfield Corporation is

Accepted Answer

Variable cost per unit can be calculated as:
Variable cost per unit = (Total variable expenses / Number of units sold) 
Total variable expenses = Direct materials + Direct labor + Variable overheads + Commission
= $0.60 + $0.80 + $0.30 + ($4.00 x 20%)
= $2.10
Variable cost per unit = ($2.10 / 70,000) 
= $0.00003
Therefore, the unit variable cost for Garfield Corporation is $2.91.

Question 12

Garfield Corporation is considering building a new plant in Canada. It predicts sales at the new plant to be 70,000 units at $3.00/unit. Below is a listing of estimated expenses:  A Canadian firm was contracted to sell the product and will receive a commission of 20% of the sales price. No U.S. home office expenses will be allocated to the new facility.
How much does the Canadian contractor expect to make in commissions?

Accepted Answer

The answer of Garfield Corporation is considering building a new...

Question 13

J&A Corporation has a monthly target operating income of $57,600. Variable expenses are 10% of sales and monthly fixed expenses are $14,400. What is J&A's operating leverage factor at the target level of operating income?

Accepted Answer

Operating leverage factor = Contribution margin ÷ Operating income

Contribution margin = Sales – Variable expenses
Fixed expenses are not considered in the calculation of contribution margin.

Let X be the amount of sales needed to achieve the target operating income.

Target operating income = X - 0.1X - $14,400
$57,600 = 0.9X - $14,400
$72,000 = 0.9X
X = $80,000

Therefore, contribution margin = $80,000 - 0.1($80,000) = $72,000

Operating leverage factor = $72,000 ÷ $57,600 = 1.25

Therefore, the correct answer is D) 5.00

Question 14

Yellow Company's variable expenses are 30% of sales and have monthly fixed expenses of $21,000. The monthly target operating income is $4200. What is the monthly margin of safety in dollars if Yellow Company achieves its operating income goal?

Accepted Answer

The answer of Yellow Company's variable expenses are 30% of...

Question 15

Mississippi Mile Travel Company is conducting a sensitivity analysis in order to assess the company's margin of safety in units and in dollars. Predicted data indicate that 4900 travel package sales can be expected while 2000 package sales are necessary to meet the company's breakeven point. Each travel package costs $2700. Calculate the company's margin of safety in package units and dollars.

Accepted Answer

The margin of safety in units is calculated as the difference between the expected sales and the breakeven sales, which is 4900 - 2000 = 2900 units. The margin of safety in dollars is calculated by multiplying the margin of safety in units by the cost per unit, which is 2900 units * $2700 = $7,830,000.

Question 16

Garfield Corporation is considering building a new plant in Canada. It predicts sales at the new plant to be 70,000 units at $7.00/unit. Below is a listing of estimated expenses.  A Canadian firm was contracted to sell the product and will receive a commission of 30% of the sales price. No U.S. home office expenses will be allocated to the new facility.
The contribution margin ratio for Garfield Corporation is

Accepted Answer