Sun Corporation has provided the following contribution format income statement. All questions concern situations that are within the relevant range.?Sales (5,000 units)$250,000?Variable expenses  162,500?Contribution margin87,500?Fixed expenses  71,750?Net operating income  $15,750Required:a. What is the margin of safety in dollars?b. What is the degree of operating leverage?

What will be an ideal response?


a. CM ratio = Contribution margin ÷ Sales = $87,500 ÷ $250,000 = 35%
Dollar sales to break even = Fixed expenses ÷ CM ratio = $71,750 ÷ 35% = $205,000
Margin of safety in dollars = Total budgeted (or actual) sales - Break-even sales
= $250,000 ? $205,000 = $45,000

b. Degree of operating leverage = Contribution margin ÷ Net operating income
= $87,500 ÷ $15,750 = 5.6

Business

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