Question

Harold McWilliams owns and manages a general merchandise store in a rural area of Virginia. Harold sells appliances, clothing, auto parts, and farming equipment, among a wide variety of other types of merchandise. Because of normal seasonal and cyclical fluctuations in the local economy, he knows that his business will also have these fluctuations, and he is planning to use CVP analysis to help him understand how he can expect his profits to change with these fluctuations. Harold has the following information for his most recent year. Cost of goods sold represents the cost paid for the merchandise he sells, while operating costs represent rent, insurance, and salaries, which are entirely fixed.

.

Sales	$	500,000
Cost of merchandise sold		270,000
Contribution margin		230,000
Operating costs		96,600
Operating profit	$	133,400

Required:

1-a. What is Harold’s margin of safety (MOS) in dollars? (Do not round intermediate calculations.)

1-b. What is the margin of safety (MOS) ratio? (Input your answer as a percentage rounded to 2 decimal places (i.e., 0.1567 = 15.67%).)

3. What is Harold’s margin of safety (in dollars) and operating profit if sales should fall to $450,000? (Do not round intermediate calculations.)

1-a.	Margin of safety (MOS)
1-b.	MOS ratio		%
3.	Margin of safety
	Operating profit

Answer 1

Ans. 1 a	Margin of safety (in dollars) = Sales - Break even sales
			$500,000 - $210,000
			$290,000
	*Calculations:
	Contribution margin ratio =   Contribution margin / Sales * 100
			$230,000 / $500,000 * 100
			46%
	Break even sales = Operating or fixed cost / Contribution margin ratio
			$96,600 / 46%
			$210,000
Ans. 1 b	Margin of safety ratio =    Margin of safety / Sales * 100
			$290,000 / $500,000 * 100
			58%
Ans. 3	Margin of safety (in dollars) = Sales - Break even sales
			$450,000 - $210,000
			$240,000
	Operating profit = (Sales * Contribution margin ratio) - Operating cost
			($450,000 * 46%) - $96,600
			$207,000 - $96,600
			$110,400
	*Operating cost is a fixed cost that is always remain constant.