Voltar Company manufactures and sells a specialized cordless

Voltar Company manufactures and sells a specialized cordless telephone for high electromagnetic radiation environments. The company\'s contribution format income statement for the most recent year is given below:

Sales (20,000 units) $1,000,000   

Variable expenses:

Variable Cost of goods sold 320,000

Variable selling 100,000

Contribution Margin 580,000

Fixed Factory Overhead 80,000

Fixed Selling 30,000

Net operating income $470,000

5. Refer to the original data. Compute the company\'s margin of safety in both dollar and percentage form.

6. a. Compute the company\'s degree of operating leverage at the present level of sales

b. Assume that through a more intense effort by the sales staff, the company\'s sales increase by 8% next year. By what percentage would you expect net operating income to increase? Use the degree of operating leverage to obtain your answer.

Solution

5. Margin of Safety

Margin of Safety = Net Operating Income / Contribution Margin Ratio

Margin of Safety = ($470000 / $580000) * 1000000

Margin of Safety in Dollars = $810344.83

Margin of Safety in % = Margin of Safety / Current Sales * 100 = $810344.83 / 1000000 * 100 = 81.03%

2. Degree of Operating Leverage = Contribution Margin / Net Income

Degree of Operating Leverage = $580000 / $470000

Degree of Operating Leverage = 1.234

3. % Increase in Net Opearting Income in net year if Sales increases by 8%

The Net Income will increase by 8% * 1.234 = 9.8720%