Question

1. Evan's Electronics Boutique sells a digital camera. The following information was reported for the digital camera last month:

Sales	$	17,600
Variable expenses		9,680
Contribution margin		7,920
Fixed expenses		3,600
Net operating income	$	4,320

Evan's margin of safety in dollars and percentage are closest to:

2.

Decaprio Inc. produces and sells a single product. The company has provided its contribution format income statement for June.

Sales (8,800 units)	$	528,000
Variable expenses		290,400
Contribution margin		237,600
Fixed expenses		211,700
Net operating income	$	25,900

If the company sells 9,200 units, its net operating income should be closest to:

Answer 1

1. Contribution margin = Sales – Variable expenses = $17,600 – $9,680 = $7,920

CM ratio = Contribution margin ÷ Sales = $7,920 ÷ $17,600 = 0.45

Dollar sales to break even = Fixed expenses ÷ CM ratio = $3,600 ÷ 0.45 = $8,000

Margin of safety in dollars = Total budgeted (or actual) sales – Break-even sales = $17,600 – $8,000 = $9,600

Margin of safety percentage = Margin of safety in dollars ÷ Total budgeted (or actual) sales = $9,600 ÷ $17,600 = 55%

2. Current sales dollars ÷ Current sales in units = Sales price per unit

$528,000 ÷ 8,800 = $60 sales price per unit

Current variable expenses ÷ Current sales in units = Variable expense per unit

$290,400 ÷ 8,800 = $33 variable expense per unit

Sales (9,200 units × $60)	$552,000
Variable expenses (9,200 units × $33)	$303,600
Contribution margin	$248,400
Fixed expenses	$211,700
Net operating income	$36,700