Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 20: 34E (page 1128)

Computing margin of safety

Robbie’s Repair Shop has a monthly target profit of \(31,000. Variable costs are 20%of sales, and monthly fixed costs are \)19,000.

Requirements

1. Compute the monthly margin of safety in dollars if the shop achieves its income goal.

2. Express Robbie’s margin of safety as a percentage of target sales.

3. Why would Robbie’s management want to know the shop’s margin of safety?

Short Answer

Expert verified
  1. If the shop achieves its income goal the margin of safety is $38,750.
  2. The margin of safety as a percentage of target sales is 62%.
  3. Margin of safety is a principle of investing that protects business against loss. Thus to maintain risk and investment managegment wants to know the margin of safety.

Step by step solution

01

Computation of Sales-

Sales=(Fixedcost+TargetprofitContributionmarginratio)=$19,000+$31,0001-0.20=$50,0000.80=$62,500

02

Computation of Break even sales-

Breakevensales=FixedexpenseContributionmarginratio=$19,0001-0.2=$19,0000.8=$23,750

03

1. Computation of Margin of safety-

Marginofsafety=Sales-Breakevensales=$62,500-$23,750=$38,750

04

2. Computation of Margin of safetyas a percentage of target sales-

Marginofsafetypercentage=MarginofsafetySales×100=$38,750$62,500×100=62%

05

Reason to know the shop’s margin of safety-

Margin of Safety is the quantity or the percentage of sales over the break-even sales. It is like a safety cover that protects a business against a loss. Higher the Margin of Safety, lower the risk of incurring loss on the other hand lower the Margin of Safety, higher the risk of carrying business.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Determining cost behavior

Identify each cost below as variable (V), fixed (F), or mixed (M), relative to units sold. Explain your reason.

Units Sold 25 50 75 100

a. Total phone cost \( 150 \) 200 \( 250 \) 300

b. Materials cost per unit 35 35 35 35

c. Manager’s salary 3,000 3,000 3,000 3,000

d. Depreciation cost per unit 60 30 20 15

e. Total utility cost 400 650 900 1,150

f. Total cost of goods sold 3,125 6,250 9,375 12,500

Owner Shan Mu is considering franchising her Noodles by Murestaurant concept. She believes people will pay \(10.00 for a large bowl ofnoodles. Variable costs are \)5.00 per bowl. Mu estimates monthly fixed costsfor a franchise at \(9,000.

Requirements

1. Use the contribution margin ratio approach to find a franchise’s breakevensales in dollars.

2. Mu believes most locations could generate \)61,500 in monthly sales. Isfranchising a good idea for Mu if franchisees want a minimum monthlyoperating income of $21,000? Explain your answer.

Question: This problem continues the Piedmont Computer Company situation from Chapter 19. Piedmont Computer Company manufactures personal computers and tablets. Based on the latest information from the cost accountant, using the current sales mix, the weighted-average sales price per unit is \(750 and the weighed-average variable cost per unit is \)450. The company does not expect the sales mix to vary for the next year. Average fixed costs per month are \(156,000.

Requirements

1. What is the number of units that must be sold each month to reach the breakeven point?

2. If the company currently sells 945 units per month, what is the margin of safety in units and dollars?

3. If Piedmont Computer Company desires to make a profit of \)15,000 per month, how many units must be sold?

4. Piedmont Computer Company thinks it can restructure some costs so that fixed costs will be reduced to \(90,000 per month, but the weighted-average variable cost per unit will increase to \)525 per unit. What is the new breakeven point in units? Does this increase or decrease the margin of safety? Why or why not?

What is cost stickiness? Why do managers need to be aware of cost stickiness?

What is sensitivity analysis? How do managers use this tool
See all solutions

Recommended explanations on Business Studies Textbooks

Managerial Economics

Read Explanation

Strategic Analysis

Read Explanation

Corporate Finance

Read Explanation

Business Development

Read Explanation

Operational Management

Read Explanation

Change Management

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free