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# Margin of Safety Calculations

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

Sales \$1,200,000
Variable expenses 800,000
Contribution margin 400,000
Fixed expenses 300,000
Net operating income \$ 100,000

The company has no beginning or ending inventories and produced and sold 20,000 units during the month.

Required:

a. What is the company's contribution margin ratio?

b. What is the company's break-even in units?

c. If sales increase by 100 units, by how much should net operating income increase?

d. How many units would the company have to sell to attain target profits of \$125,000?

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

f. What is the company's degree of operating leverage?

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#### Solution Preview

Required:

a. What is the company's contribution margin ratio?

=Contribution Margin/Sales
=400000/1200000
=33%

b. What is the company's break-even in units?

Break even sales in Dollars= Fixed cost/Contribution margin ratio
=300000/33%
=\$909090.9091

Break even ...

#### Solution Summary

The response shows all the steps to computing margins of safety as described in the question.

\$2.19