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	$	860,000
Cost of merchandise sold		593,400
Contribution margin		266,600
Operating costs		126,480
Operating profit	$	140,120

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 $720,000? (Do not round intermediate calculations.)

Answer 1

• All working forms part of the answer
• Requirement 1’a’ and ‘b’

A	Contribution margin	$266,600
B	Sales	$860,000
C = (A/B)	CM Ratio	31%
D	Operating cost - Fixed	$126,480
E = D/C	Break Even Sales	$408,000
F = B - E	Margin of Safety in dollars	$452,000	Answer: Requirement 1'a'
G = (F/B) x 100	Margin of Safety Ratio	52.56%	Answer: Requirement 1'b'

• Requirement 3

A	Sales	$720,000
B = A x 31%	Contribution margin	$223,200
C	Operating cost - Fixed	$126,480
D = B - C	Operating Profits	$96,720	Answer: Requirement 3
E = A - $ 408000	New margin of Safety in Dollars	$312,000	Answer: Requirement 3