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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?
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?
Expert Answer
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
