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, that are entirely fixed.

Sales .............$650,000

Cost of goods sold ...... 422,500

Contribution margin ....... 227,500

Operating costs ......... 105,000

Operating profit ........$122,500

Required

1. What is Harold’s margin of safety in dollars? What is the margin of safety ratio?

2. What is Harold’s margin of safety and operating profit if sales should fall to $500,000?