Question

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

Sales	$	70,000
Variable expenses		38,500
Contribution margin		31,500
Fixed expenses		23,310
Net operating income	$	8,190

What is the break-even point in dollar sales?

. How many units must be sold to achieve a target profit of $18,900?

What is the margin of safety in dollars? What is the margin of safety percentage?

What is the degree of operating leverage? (Round your answer to 2 decimal places.)

Answer 1

Contribution Margin ratio = $31500 / 70000 = 45%

Break even point in dollars = Fixed Expenses / Contribution Margin ratio
= $23310 / 45% = $51800

Units to be sold for target profit = (Fixed Expenses+Target profit) / Contribution Margin per unit
= ($23310+18900) / 31.50 = 1340 units

Margin of safety = Actual sales - Break even sales
= $70000 - $51800 = $18200

Margin of safety percentage = $18200 / 70000 = 26%

Degree of Operating leverage = Contribution Margin / Net operating income
= $31500 / 8190 = 3.85