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Unformatted text preview: The margin of safety is the excess of
budgeted (or actual) sales over the
breakeven volume of sales.
Margin of safety = Total sales – Breakeven sales Let’s look at Racing Bicycle Company and
determine the margin of safety. LO 7 The Margin of Safety
Racing Bicycle Company has actual sales of
$250,000, given that we have already determined
the breakeven sales to be $200,000
Breakeven
sales
400 units
Sales
$ 200,000
Less: variable expenses
120,000
Contribution margin
80,000
Less: fixed expenses
80,000
Net operating income
$
 Actual sales
500 units
$ 250,000
150,000
100,000
80,000
$
20,000
LO 7 Quick Check Coffee Klatch is an espresso stand in a
downtown office building. The average selling
price of a cup of coffee is $1.49 and the average
variable expense per cup is $0.36. The average
fixed expense per month is $1,300. 2,100 cups
are sold each month on average. What is the
margin of safety?
a. 3,250 cups
b. 950 cups
c. 1,150 cups
d. 2,100 cups
LO 7 Cost Structure and Profit Stability
There are advantages and disadvantages to high fixed cost
(or low variable cost) and low fixed cost (or high variable
cost) structures. An advantage of a high fixed
cost structure is that income A disadvantage of a high fixed
will be higher in good years cost structure is that income
compared to companies
will be lower in bad years
with lower proportion of
compared to companies
fixed costs.
with lower proportion of
fixed costs.
Companies with low fixed cost structures enjoy greater
stability in income across good and bad years.
LO 8 Operating Leverage
A measure of how sensitive net operating
income is to percentage changes in sales.
Degree of
Contribution margin
=
operating leverage
Net operating income LO 8 Operating Leverage 10% increase in sales from
$250,000 to $275,000 . . .
. . . results in a 50% increase in
income from $20,000 to $30,000. LO 8 Quick Check Coffee Klatch is an espresso stand in a
downtown office building. The average selling
price of a cup of coffee is $1.49 and the average
variable expense per cup is $0.36. The average
fixed expense per month is $1,300. 2,100 cups
are sold each month on average. What is the
operating leverage?
a. 2.21
b. 0.45
c. 0.34
d. 2.92
LO 8 Quick Check At Coffee Klatch the average selling price of a cup
of coffee is $1.49, the average variable expense per
cup is $0.36, the average fixed expense per month
is $1,300 and an average of 2,100 cups are sold
each month.
If sales increase by 20%, by how much should net
operating income increase?
. 30.0%
. 20.0%
. 22.1%
LO 8 Verify Increase in Profit
Actual
sales
2,100 cups
Sales
$ 3,129
Less: Variable expenses
756
Contribution margin
2,373
Less: Fixed expenses
1,300
Net operating income
$ 1,073
% change in sales
% change in net operating income Increased
sales
2,520 cups
$
3,755
907
2,848
1,300
$
1,548
20.0%
44.2%
LO 8 Structuring Sales Commissions
Pipeline Unlimited produces two types of surfboards:
Price/unit CM/unit XR7 $100 $25 Turbo $150 $18 The sales force at Pipeline Unlimited is
compensated based on sales commissions. LO 8 The Concept of Sales Mix
Sales mix is the relative proportion in
which a company’s products are sold. Different products have different selling
prices, cost structures, and
contribution margins. Let’s assume Racing Bicycle Company
sells bikes and carts and that the sales
mix between the two products remains
the same. LO 9 Multiproduct breakeven analysis
Racing Bicycle Co. provides the following
information: $265,000
= 48.2% (rounded)
$550,000
LO 9 Multiproduct breakeven analysis
Breakeven
sales Fixed expenses
=
CM Ratio
$170,000
=
48.2%
= $352,697 LO 9...
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This note was uploaded on 03/28/2014 for the course ACTG 2020 taught by Professor Lizfarrel during the Spring '11 term at York University.
 Spring '11
 LizFarrel
 Accounting, Managerial Accounting

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