(Answered): Martin Holdings prepared the following budgeted income statement for the coming year….

Martin Holdings prepared the following budgeted income statement for the coming year.

Sales revenue $ 515,000
Total variable cost 402,950
Contribution Margin $112,050
Total Fixed costs 64,800
Operating income $47,250

1 what is Martin Holding’s variable cost ratio? What is its contribution margin ratio?

2 Suppose Martin Holdings’s actual revenues are $35,000 more than budgeted. By how much will operating income increase? Give the answer without preparing a new income statement.

3 How much sales revenue must Martin Holdings earn to break even? Prepare a contribution margin income statement to verify the accuracy of your answer.

4 What is Martin Holdings’s expected margin of safety?

5 What is Martin Holdings’s margin of safety if sales revenue is $380,000?

Expert Answer


1. Variable cost ratio = Variable cost/Sales = $402,950 / $515,000 = 78.24%

Contribution margin ratio = Contribution margin/Sales = $112,050 / $515,000 = 21.76%

2. If sales increase $35,000, operating income will increase an amount of Contribution margin ratio: $35,000 x 0.2176 = $7,616

3. BEP = FC / Contribution margin ratio = $64,800 / 0.2176 = $297,794.12

Income statement:

Sales $297,794.12
Less: Variable expenses $232,994.12
Contribution margin $64,800
Less: Fixed expenses $64,800
Operating income $0

4. Expected margin of safety = $515,000 – $297,794.12 = $217,205.88

5. If sales revenue is $380,000, margin of safety is $380,000 – $297,794.12 = $82,205.88

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