Question: The Central Valley Company is a merchandising firm that sells a single product. The company's revenues and expenses for the last three months are given below:

CENTRAL VALLEY COMPANY Comparative Income Statement for the Second Quarter

April May June

Sales in units 4,500 5,250 6,000

Sales revenue$630,000$735,000$840,000

Less: Cost #1 MC143,000161,750180,500

Cost #2 VC252,000294,000336,000

Cost #3 MC56,00063,50071,000

Cost #4 FC70,00070,00070,000

Cost #5 FC9,0009,0009,000

Cost #6 FC42,00042,00042,000

Total operating expenses320,000346,250372,500

Operating income$58,000$94,750 131500

Cost #1:Cost Formula: Y = $30,500 + $25/unit * X

Cost #3:Cost Formula: Y = $11,000 + $10/unit * X

Required:

A. What is the margin of safety ($ and %) in May?

B. What is the degree of operating leverage in May?

C. Central Valley Company expects future sales to rise rapidly.

Do you recommend that they use a relatively high or low degree of operating leverage? Clearly explain.