The margin of safety in dollars is $ Requirement 3. Use the coffee shop\'s opera

Question

The margin of safety in dollars is $ Requirement 3. Use the coffee shop's operating leverage factor (using the October contribution margin income statement) to determine its new operating income if sales volume increases 13%. Prove your results using the contribution margin income statement format. Assume that sales mix remains unchanged. Identify the formula to compute the operating leverage factor. Operating leverage factor Round your answer to two decimal places.) Morgantown Coffee's operating leverage factor is If Morgantown Coffee can increase sales revenue by 13%, keeping the sales mix the same, operating income will be $ Prepare a summary contribution margin income statement o prove your answer a ove. For amounts with a SO ala ce make sure t en er"?.in he appropriate co

Explanation / Answer

Req 1: Contribution margin per unit of Small coffee: $ 2.00 -1.00 = $ 1.00 per unit Contrbution margin per unit of large coffee: $ 4.00 -2.00 =$2.00 per unit Sales mix is 3:1 of Small and large coffee Contribution margin of Sales mix: 3 units @1+ 1 unit @2$2 = $5 per sales mix. Break even point in terms of sales mix: Fixed cost / Contribution margin per sales mix (22500 /5 ) = 4500 sales mix To be break even point, Number of units of Small coffee:4500*3 = 13500 units Number of units of large units: 4500*1 = 4500 units Req 2: Contrbution= $ 47500 Sales: $ 95,000 CM ratio: Contribution/ Sales *100 = 47500 /95000 *100 = 50% Net Income: $ 25000 Margin of safety in $= Net income/ CM ratio = $25000 /50% = $50,000 Req 3: Degree of Opeerating leverage: Contribution/ Net income = 47500/25000 =1.9 Now, if sales revenue increase by 13% Net income increase by 24.7% (i.e. 13%*1.9) CONTRIBUTION MARGIN INCOME STATEMENT: Sales revenue (95000+13%) 107350 Less: Variable ccost (47500+13%) 53675 Contribution margin   53675 Less: Fixed cost 22500 Net income    31175 Less: original income 25000 Increase in income 6175 % increase in income 24.70%

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