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9-29 Margin of Safety Harold McWilliams owns and manages a general merchandise store in a...

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Accounting

9-29

Margin of Safety Harold McWilliams owns and manages a general merchandise store in a rural area of Virginia. Harold sells appliances, clothing, auto parts, and farming equipment, among a wide variety of other types of merchandise. Because of normal seasonal and cyclical fluctuations in the local economy, he knows that his business will also have these fluctuations, and he is planning to use CVP analysis to help him understand how he can expect his profits to change with these fluctuations. Harold has the following information for his most recent year. Cost of goods sold represents the cost paid for the merchandise he sells, while operating costs represent rent, insurance, and salaries, which are entirely fixed.

Sales $650,000
Cost of merchandise sold 422,500
Contribution margin 227,500
Operating costs 105,000
Operating profit $122,500

Required

  1. What is Harolds margin of safety (MOS) in dollars? What is the margin of safety (MOS) ratio?

  2. Of what managerial significance are the measures calculated in requirement 1?

  3. What is Harolds margin of safety (in dollars) and operating profit if sales should fall to $500,000?

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