Question 1

Neeley Grocery has a monthly target operating income of $25,000. Variable expenses are 20% of sales and monthly fixed expenses are $15,000. What is the monthly margin of safety as a percentage of target sales in dollars?

Accepted Answer

B)
Fixed expenses 15,000
Target income 25,000
40,000
Contribution margin 80% (Variable expense of 20%)
Target sales 50,000
Fixed expense 15,000
Contribution margin 80%
Break -even sales 18,750 (15,000 / .80)
Target sales 50,000
- Breakeven sales 18,750
Margin safety 31,250
% of Target sales 62.50% (31,250 / 50,000)

Question 2

Garfield Corporation is considering building a new plant in Canada. It predicts sales at the new plant to be 50,000 units at $5.00/unit. Below is a listing of estimated expenses.  A Canadian firm was contracted to sell the product and will receive a commission of 10% 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

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

Question 3

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 4

Neeley Grocery has a monthly target operating income of $25,000. Variable expenses are 20% of sales and monthly fixed expenses are $15,000. What is Neeley Grocery's operating leverage factor at the target level of operating income?

Accepted Answer

D)
Fixed expenses $25,000
+ Target income 15,000
40,000
Operating leverage 1.60 (40,000 / 25,000)

Question 5

Garfield Corporation is considering building a new plant in Canada. It predicts sales at the new plant to be 50,000 units at $5.00/unit. Below is a listing of estimated expenses:  A Canadian firm was contracted to sell the product and will receive a commission of 10% 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 6

Neeley Grocery has a monthly target operating income of $25,000. Variable expenses are 20% of sales and monthly fixed expenses are $15,000. What is the monthly margin of safety in dollars if the business achieves its operating income goal?

Accepted Answer

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

Target operating income = Sales - Variable expenses - Fixed expenses

$25,000 = 0.8(Sales) - $15,000

$40,000 = 0.8(Sales)

Sales = $50,000

The margin of safety is the amount by which sales can fall below the expected level before the business starts losing money.

Margin of safety = Total sales - Break-even sales

Total sales = $50,000

Break-even sales = ($15,000 + 0.2 x $50,000) = $25,000

Margin of safety = $50,000 - $25,000 = $25,000

Therefore, the monthly margin of safety in dollars is $31,250 ($25,000/0.8).

Option B is the best choice.

Question 7

Garfield Corporation is considering building a new plant in Canada. It predicts sales at the new plant to be 50,000 units at $5.00/unit. Below is a listing of estimated expenses:  A Canadian firm was contracted to sell the product and will receive a commission of 10% 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

To calculate the unit variable cost, we need to subtract the total variable cost per unit from the sales price. The total variable cost is $2.40 ($0.60 material + $1.20 labor + $0.60 variable overhead). Therefore, the unit variable cost is $5.00 - $2.40 = $2.60. However, we need to add the commission that the Canadian firm will receive, which is 10% of the sales price, or $0.50/unit ($5.00 x 0.10). Thus, the unit variable cost is $2.60 + $0.50 = $3.10. Therefore, the correct answer is B.

Question 8

Garfield Corporation is considering building a new plant in Canada. It predicts sales at the new plant to be 50,000 units at $5.00/unit. Below is a listing of estimated expenses:  A Canadian firm was contracted to sell the product and will receive a commission of 10% of the sales price. No U.S. home office expenses will be allocated to the new facility.
The margin of safety percentage for Duncan Enterprises is

Accepted Answer

To calculate the margin of safety percentage, we need to first calculate the break-even point (BEP).

BEP = Fixed Costs / Contribution Margin

Fixed costs = $240,000 + $60,000 + $10,000 = $310,000

Contribution Margin per unit = Sales Price per unit - Variable Costs per unit 
= $5 - $1.50 - $0.50 = $3

BEP = $310,000 / $3 = 103,333.33 units

To calculate the margin of safety, we subtract the BEP from the expected sales:

Margin of Safety = (Expected Sales - BEP) / Expected Sales

Expected Sales = 50,000 units x $5/unit = $250,000

Margin of Safety = (250,000 - 103,333.33) / 250,000 = 0.5857 or 58.57%

Therefore, the margin of safety percentage is 58.57%.

The closest answer choice is B (35.71%), which is incorrect.

Question 9

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...

Quiz 7: Cost-Volume-Profit Analysis

Neeley Grocery has a monthly target operating income of $25,000. Variable expenses are 20% of sales and monthly fixed expenses are $15,000. What is the monthly margin of safety as a percentage of target sales in dollars?

Neeley Grocery has a monthly target operating income of $25,000. Variable expenses are 20% of sales and monthly fixed expenses are $15,000. What is Neeley Grocery's operating leverage factor at the target level of operating income?

Neeley Grocery has a monthly target operating income of $25,000. Variable expenses are 20% of sales and monthly fixed expenses are $15,000. What is the monthly margin of safety in dollars if the business achieves its operating income goal?