Question

The following is TJLS Corporation's contribution format income statement for last month:

Sales $1,200,000

Less: Variable Expenses: $800,000

Contribution Margin: $400,000

Less: Fixed Expenses: $300,000

Operating Income: $100,000

5. What is the company's margin of safety in dollars?

6. What is the company's degree of operating leverage? Explain how a company could use this number in terms a non-accountant could understand.

7. If the tax rate is 30%, how many units must be sold to attain an after-tax profit of $84,000?

You can use either the formula or equation methods to show your answers.

Answer 1

Answer to Part 5.

Margin of Safety = Current Sales – Break Even Sales
Break Even Sales = Fixed Cost / Contribution Margin Ratio
Contribution Margin Ratio = Contribution Margin / Sales * 100
Contribution Margin Ratio = 400,000 / 1,200,000 * 100
Contribution Margin Ratio = 33.33%

Break Even Sales = 300,000 / 0.3333
Break Even Sales = $900,090

Margin of Safety = $1,200,000 - $900,090
Margin of Safety = $299,910

Answer to Part 6.

Degree of Operating Leverage = Contribution margin / Operating Income
Degree of Operating Leverage = 400,000 / 100,000
Degree of Operating Leverage = 4.0 times

Answer to Part 7.

After Tax Profit = $84,000
Before Tax Profit = $120,000

Before Tax Profit = Contribution Margin Ratio * Sales – Fixed Cost
Let The Sales be “$x” required to attain the profit of $84,000
$120,000 = ($x* 0.3333) – 300,000
$420,000 = 0.3333 * x
x = $1,260,126