Chapter 20: Q20-23RQ (page 1120)
What is the margin of safety? What are the three ways it can be expressed?
Answer
The margin of safety is a cushion between profit and loss.
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National Investor Group is opening an office in Portland, Oregon. Fixed monthly costs are office rent (\(8,100), depreciation on office furniture (\)1,700), utilities (\(2,000), special telephone lines (\)1,500), a connection with an online brokerage service (\(2,500), and the salary of a financial planner (\)5,200). Variable costs include payments to the financial planner (9% of revenue), advertising (11% of revenue), supplies and postage (4% of revenue), and usage fees for the telephone lines and computerized brokerage service (6% of revenue).
Requirements
Using terminology Match the following terms with the correct definitions:
1. Costs that do not change in total over wide ranges of volume.
2. Technique that estimates profit or loss results when conditions change.
3. The sales level at which operating income is zero.
4. Drop in sales a company can absorb without incurring an operating loss.
5. Combination of products that make up total sales.
6. Net sales revenue minus variable costs.
7. Describes how a cost changes as volume changes.
8. Costs that change in total in direct proportion to changes in volume.
9. The band of volume where total fixed costs and variable cost per unit remain constant.
a. Breakeven point
b. Contribution margin
c. Cost behavior
d. Margin of safety
e. Relevant range
f. Sales mix
g. Fixed costs
h. Variable costs
i. Sensitivity analysis
What are the three approaches to calculating the sales required to achieve the breakeven point? Give the formula for each one.
What is a fixed cost? Give an example.
Use the following information to complete Short Exercises S20-16 and S20-17.
Wild Waters Swim Park sells individual and family tickets. With a ticket, each person receives a meal, three beverages, and unlimited use of the swimming pools. Wild Waters has the following ticket prices and variable costs for 2018:
Individual Family Sales price per ticket \( 50 \) 150 Variable cost per ticket 35 140
Wild Waters expects to sell one individual ticket for every four family tickets. Wild Waters’s total fixed costs are $27,500.
S20-17 Calculating breakeven point for two products
For 2019, Wild Waters expects a sales mix of four individual tickets for every one family ticket.
Requirements
1. Compute the new weighted-average contribution margin per ticket.
2. Calculate the total number of tickets Wild Waters must sell to break even.
3. Calculate the number of individual tickets and the number of family tickets the company must sell to break even.
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