Principles of Managerial Accounting · free preview
Margin of Safety and Operating Leverage
The margin of safety measures how far actual sales sit above break-even, while operating leverage measures how sharply profit responds to a sales change, and both deepen as fixed costs rise.
1. Margin of safety
Margin of safety
2. Degree of operating leverage
Degree of operating leverage
3. Why fixed costs drive both measures
Why fixed costs drive both measures
4. Using the pair together
Using the pair together
5. Margin of safety computation
Actual sales are 100,000 dollars and break-even sales are 60,000 dollars. Compute the margin of safety in dollars.
6. Margin of safety percentage
Actual sales are 100,000 dollars and the margin of safety is 40,000 dollars. Compute the margin of safety as a percentage of actual sales.
7. DOL computation
Contribution margin is 40,000 dollars and operating income is 16,000 dollars. Compute the degree of operating leverage.
8. Income effect of a sales change
DOL is 2.5 and sales rise 10 percent. Compute the approximate percentage change in operating income.
9. Fixed cost structure effect
All else equal, raising fixed costs while cutting variable costs raises operating ____. One word.
10. Thin cushion term
A company whose sales sit barely above break-even has a thin margin of ____. One word.
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