Compute margin of safety and operating leverage (Learning Objective 5)

Ronnie’s Repair Shop has a monthly target operating income of $12,000. Variable expenses are 70% of sales, and monthly fixed expenses are $9,000.

Requirements 1. Compute the monthly margin of safety in dollars if the shop achieves its income goal.

2. Express Ronnie’s margin of safety as a percentage of target sales.

3. What is Ronnie’s operating leverage factor at the target level of operating income?

4. Assume that Ronnie reaches his target. By what percentage will Ronnie’s operat¬ ing income fall if sales volume declines by 10% ?