# Question & Answer: Martin Holdings prepared the following budgeted income statement for the coming year……

Martin Holdings prepared the following budgeted income statement for the coming year.

 Sales revenue \$ 515,000 Total variable cost 402,950 Contribution Margin \$112,050 Total Fixed costs 64,800 Operating income \$47,250

1 what is Martin Holding’s variable cost ratio? What is its contribution margin ratio?

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2 Suppose Martin Holdings’s actual revenues are \$35,000 more than budgeted. By how much will operating income increase? Give the answer without preparing a new income statement.

3 How much sales revenue must Martin Holdings earn to break even? Prepare a contribution margin income statement to verify the accuracy of your answer.

4 What is Martin Holdings’s expected margin of safety?

5 What is Martin Holdings’s margin of safety if sales revenue is \$380,000?

1. Variable cost ratio = Variable cost/Sales = \$402,950 / \$515,000 = 78.24%

Contribution margin ratio = Contribution margin/Sales = \$112,050 / \$515,000 = 21.76%

2. If sales increase \$35,000, operating income will increase an amount of Contribution margin ratio: \$35,000 x 0.2176 = \$7,616

3. BEP = FC / Contribution margin ratio = \$64,800 / 0.2176 = \$297,794.12

Income statement:

 Sales \$297,794.12 Less: Variable expenses \$232,994.12 Contribution margin \$64,800 Less: Fixed expenses \$64,800 Operating income \$0

4. Expected margin of safety = \$515,000 – \$297,794.12 = \$217,205.88

5. If sales revenue is \$380,000, margin of safety is \$380,000 – \$297,794.12 = \$82,205.88