Question

Zaccaria Corporation has provided the following contribution format income statement. questions concern situations that are within the relevant range. Sales (5,000 units) Variable expenses Contribution margin Fixed expenses Net operating income $300,000 240,000 60,000 58,800 $1,200 Required: What is the contribution margin ratio? (Show your computations). What is the break-even point in unit of sales? (Show your computations). What is the margin of safety in dollars? (Show your computations). What is the degree of operating leverage? (Show your computations).

Answer 1

1) Contribution margin ratio

• The contribution margin ratio is the difference between a company's sales and variable expenses, expressed as a percentage.

CMR = Total contribution margin / Total sales

   = 60000 / 300000

CMR = 0.20 or 20%

2) Break-even point in units of sales

• It's the point where sales and expenses are the same or when the sales of a company are enough to cover the expenses of the business

Bep in units = Total fixed cost / cm per units

= 58800 / 12

   bep in units = 4900 units

3) Margin of safety in dollars

• The margin of safety is the difference between the amount of expected profitability and the break-even point. The margin of safety formula is equal to current sales minus the break-even sales

Margin of safety in dollars = Current sales – Break-even sales(bep in units x selling price ).

= 300000 – (4900 x 60)

= 300000 – 294000

MOS in dollars = $6000

4) Degree of operating leverage

• The degree of operating leverage (DOL) is a measure used to evaluate how a company's operating income changes after a percentage change in its sales. A company's operating leverage involves fixed costs and variable costs.

DOL = Contribution margin / operating income or (EBIT)

= 60000 / 1200

DOL = 50