Managerial Accounting Quiz: Margin Of Safety And Operating Leverage
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Margin Of Safety And Operating LeverageQuestion 1 of 19

For a profitable company, if the margin of safety percentage increases while the company's cost structure and selling price per unit remain unchanged, what is the corresponding impact on its degree of operating leverage (DOL)?

The DOL will increase.
The DOL will decrease.
The DOL will remain unchanged.
The impact cannot be determined without knowing the fixed costs.
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Managerial Accounting Quiz

Managerial Accounting Quiz: Margin Of Safety And Operating Leverage

Practice Margin Of Safety And Operating Leverage in Managerial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Margin Of Safety And Operating Leverage, giving you a quick way to practice the rules, question types, and explanations that matter most for Managerial Accounting.

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Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

For a profitable company, if the margin of safety percentage increases while the company's cost structure and selling price per unit remain unchanged, what is the corresponding impact on its degree of operating leverage (DOL)?

  1. The DOL will increase.
  2. The DOL will decrease. (correct answer)
  3. The DOL will remain unchanged.
  4. The impact cannot be determined without knowing the fixed costs.
Explanation: This is a conceptual question about the relationship between margin of safety (MOS) and degree of operating leverage (DOL). An increase in the MOS percentage means that the current sales level is moving further away from the break-even point. This can only happen if the sales volume (in units) increases, since all other variables are held constant. The formula for DOL is Contribution Margin / Net Operating Income. Let's analyze the effect of increased sales volume:
  • DOL = (CM) / (CM - Fixed Costs) As sales volume increases, the Contribution Margin (CM) increases. While the numerator (CM) and denominator (CM - Fixed Costs) both increase, the proportional increase in the denominator is larger than the proportional increase in the numerator because fixed costs are a constant deduction. This causes the ratio to decrease.
For example, assume FC = $100, CM/unit = $10.
  • At 20 units (NOI=100),DOL=(100), DOL = (200)/($100) = 2.0
  • At 30 units (NOI=200),DOL=(200), DOL = (300)/($200) = 1.5 As sales increase, DOL decreases. Therefore, as the MOS % increases due to higher sales, the DOL decreases.

Question 2

A company with a 35% tax rate needs to achieve an after-tax profit of $195,000. The company's contribution margin ratio is 40% and its annual fixed costs are $500,000. The company's current sales are $2,500,000. What is the margin of safety in dollars, relative to the sales level required to meet the after-tax profit target?

  1. $250,000
  2. $500,000 (correct answer)
  3. $750,000
  4. $1,250,000
Explanation: This question requires calculating a modified margin of safety relative to a target profit, and it incorporates taxes.
  1. Calculate the required pre-tax profit: Pre-tax Profit = After-Tax Profit / (1 - Tax Rate) = $195,000 / (1 - 0.35) = $195,000 / 0.65 = $300,000.
  2. Calculate the sales dollars required to achieve the target pre-tax profit: Target Sales = (Fixed Costs + Target Pre-tax Profit) / CM Ratio = ($500,000 + $300,000) / 0.40 = $800,000 / 0.40 = $2,000,000.
  3. Calculate the margin of safety relative to the target: MOS = Current Sales - Target Sales = $2,500,000 - $2,000,000 = $500,000.
Distractor Rationale:
  • A: This could result from an error in the pre-tax profit calculation.
  • C: This is the standard margin of safety relative to the break-even point (BEP = $500k/0.4 = $1,250k; MOS = $2,500k - $1,250k = $1,250k). Oh, wait, D is the standard MOS. Let me re-calculate. BEP = $500,000 / 0.40 = $1,250,000. Standard MOS = $2,500,000 - $1,250,000 = $1,250,000. So D is the standard MOS. This is a great distractor for students who miss the 'relative to the target profit' detail.
  • D: This is the standard margin of safety relative to the break-even point, not the target profit sales level.

Question 3

At its current sales level of $400,000, a company has a contribution margin of $160,000 and a degree of operating leverage of 2.0. The marketing manager proposes a new advertising campaign that will increase fixed costs by $30,000 and increase sales by 25%. What would be the company's new degree of operating leverage if the campaign is implemented?

  1. 2.00
  2. 2.20
  3. 2.40 (correct answer)
  4. 2.80
Explanation: This problem requires calculating a new DOL after changes to sales and fixed costs.
  1. Find original fixed costs (FC) and NOI:
    • DOL = CM / NOI => 2.0 = $160,000 / NOI => Original NOI = $80,000
    • FC = CM - NOI = $160,000 - $80,000 = $80,000
  2. Calculate new values after the campaign:
    • New Sales = $400,000 × 1.25 = $500,000
    • The CM Ratio is unchanged: $160,000 / $400,000 = 40%
    • New CM = $500,000 × 40% = $200,000
    • New FC = $80,000 + $30,000 = $110,000
    • New NOI = New CM - New FC = $200,000 - $110,000 = $90,000
  3. Calculate the new DOL:
    • New DOL = New CM / New NOI = $200,000 / $90,000 = 2.22, rounded to 2.20
Distractor Rationale:
  • A: This is the original DOL
  • C: Could result from calculation error in fixed costs
  • D: Could result from error in sales increase calculation

Question 4

A company is currently profitable and sells a single product. If the company increases its fixed costs (e.g., through higher advertising) and this results in a higher level of sales, but the degree of operating leverage remains exactly the same, which of the following must be true?

  1. The percentage increase in sales was equal to the percentage increase in fixed costs.
  2. The percentage increase in contribution margin was equal to the percentage increase in net operating income.
  3. The company's margin of safety in dollars decreased.
  4. The percentage increase in contribution margin was equal to the percentage increase in fixed costs. (correct answer)
Explanation: This is a complex conceptual question. Let the subscript 1 denote the original state and 2 denote the new state. DOL = CM / (CM - FC). We are given DOL₁ = DOL₂. So, CM₁ / (CM₁ - FC₁) = CM₂ / (CM₂ - FC₂). Let's cross-multiply: CM₁ * (CM₂ - FC₂) = CM₂ * (CM₁ - FC₁) CM₁CM₂ - CM₁FC₂ = CM₂CM₁ - CM₂FC₁ -CM₁FC₂ = -CM₂FC₁ CM₁FC₂ = CM₂FC₁ Rearranging gives: CM₂ / CM₁ = FC₂ / FC₁. This equation shows that the ratio of the new CM to the old CM is the same as the ratio of the new FC to the old FC. In other words, the percentage increase in contribution margin must be equal to the percentage increase in fixed costs for the DOL to remain unchanged. Distractor Rationale:
  • A: There's no direct mathematical requirement for this to be true.
  • B: This would imply DOL = 1, which is not stated.
  • C: The margin of safety could increase, decrease, or stay the same depending on the magnitude of the changes.

Question 5

Stark Industries has a degree of operating leverage of 4.0. The company projects that sales will decrease by 15% in the next quarter. If current contribution margin is $600,000, what is the projected net operating income for the next quarter?

  1. $60,000 (correct answer)
  2. $90,000
  3. $127,500
  4. $150,000
Explanation: This problem requires using the degree of operating leverage (DOL) to predict changes in net operating income (NOI), and it involves multiple steps to arrive at a dollar value.
  1. Calculate current NOI: DOL = Contribution Margin (CM) / NOI. So, 4.0 = $600,000 / NOI, which gives a current NOI of $600,000 / 4.0 = $150,000.
  2. Calculate the percentage decrease in NOI: % Change in NOI = DOL × % Change in Sales. So, % Decrease in NOI = 4.0 × 15% = 60%.
  3. Calculate the projected NOI: The NOI is projected to decrease by 60%. The new NOI will be 100% - 60% = 40% of the original NOI. Projected NOI = $150,000 × (1 - 0.60) = $150,000 × 0.40 = $60,000.
Distractor Rationale:
  • B: This is the dollar amount of the decrease in NOI ($150,000 * 60% = $90,000), not the final projected NOI.
  • C: This is the result of incorrectly decreasing the current NOI by the sales decrease percentage ($150,000 * (1 - 0.15) = $127,500).
  • D: This is the current NOI, before the projected decrease.

Question 6

Data for two companies with the same sales revenue and net operating income are presented below:

  • Company Alpha: Variable costs are 80% of sales.
  • Company Beta: Variable costs are 50% of sales.

Based on this information, which of the following statements is correct?

  1. Company Alpha has a higher degree of operating leverage and a higher margin of safety.
  2. Company Beta has a higher degree of operating leverage and a higher margin of safety.
  3. Company Alpha has a higher degree of operating leverage and a lower margin of safety.
  4. Company Beta has a higher degree of operating leverage and a lower margin of safety. (correct answer)
Explanation: This question requires a conceptual comparison of two firms with different cost structures.
  1. Analyze Contribution Margin (CM): Company Alpha's CM ratio is 1 - 80% = 20%. Company Beta's CM ratio is 1 - 50% = 50%. Since sales are the same, Beta has a higher total CM.
  2. Analyze Fixed Costs (FC): Both companies have the same Net Operating Income (NOI). Since NOI = CM - FC, and Beta has a higher CM, Beta must also have higher FC to arrive at the same NOI.
  3. Analyze Degree of Operating Leverage (DOL): DOL = CM / NOI. Since both have the same NOI but Beta has a higher CM, Company Beta has a higher DOL.
  4. Analyze Margin of Safety (MOS): A higher FC and a higher CM ratio affect the break-even point (BEP = FC / CM Ratio). Let Sales = $100. Alpha CM = $20, Beta CM = $50. Let NOI = $10. Alpha FC = $10, Beta FC = $40. Alpha BEP = $10 / 20% = $50. Beta BEP = $40 / 50% = 80.SinceBetahasahigherbreak−evenpoint(80. Since Beta has a higher break-even point (80 vs 50),itsmarginofsafety(50), its margin of safety (100 - $80 = 20)willbelowerthanAlpha′s(20) will be lower than Alpha's (100 - $50 = $50).
Therefore, Company Beta has a higher degree of operating leverage and a lower margin of safety.

Question 7

A company currently sells 10,000 units for $50 per unit. The contribution margin per unit is $20, and fixed costs are $120,000 per year. If sales are expected to increase to 12,000 units, what will be the degree of operating leverage at this higher sales level?

  1. 2.00 (correct answer)
  2. 2.50
  3. 2.75
  4. 3.00
Explanation: This question tests the calculation of operating leverage at a different level of activity, demonstrating that DOL is not constant.
  1. Calculate the new total contribution margin (CM): New Sales Volume × CM per unit = 12,000 units × $20/unit = $240,000.
  2. Fixed costs remain the same at $120,000.
  3. Calculate the new net operating income (NOI): New CM - Fixed Costs = $240,000 - $120,000 = $120,000.
  4. Calculate the new degree of operating leverage (DOL): New CM / New NOI = $240,000 / $120,000 = 2.00.
Distractor Rationale:
  • B: This is the DOL at the original sales level of 10,000 units (CM = 10,000 * $20 = $200,000; NOI = $200,000 - $120,000 = $80,000; DOL = $200,000 / $80,000 = 2.50). Students who fail to recalculate for the new sales level would choose this.
  • C: A plausible but incorrect calculation.
  • D: This would be the DOL if fixed costs were 160,000(160,000 (240,000 / ($240,000-$160,000)).

Question 8

Zenith Manufacturing has fixed costs of $240,000, variable costs per unit of $18, and a selling price of $30 per unit. If the company currently sells 25,000 units annually, what is the operating leverage factor, and how would a 15% increase in sales volume affect net income?

  1. Operating leverage is 1.25; net income would increase by 18.75%
  2. Operating leverage is 2.50; net income would increase by 37.50% (correct answer)
  3. Operating leverage is 1.67; net income would increase by 25.05%
  4. Operating leverage is 3.00; net income would increase by 45.00%
Explanation: First, calculate contribution margin per unit: $30 - $18 = $12. Total contribution margin: 25,000 × $12 = $300,000. Net income: $300,000 - $240,000 = $60,000. Operating leverage = Total contribution margin ÷ Net income = $300,000 ÷ $60,000 = 2.50. A 15% increase in sales would increase net income by 2.50 × 15% = 37.50%.

Question 9

Gamma Corporation's current operating leverage is 3.2, and the company has a margin of safety ratio of 25%. If Gamma's contribution margin ratio is 45%, what percentage of current sales volume represents the break-even point?

  1. 75% of current sales volume represents the break-even point (correct answer)
  2. 68.75% of current sales volume represents the break-even point
  3. 80% of current sales volume represents the break-even point
  4. 62.5% of current sales volume represents the break-even point
Explanation: The margin of safety ratio of 25% means that sales above break-even represent 25% of total current sales. Therefore, the break-even point represents 100% - 25% = 75% of current sales volume. The operating leverage and contribution margin ratio information, while related to these concepts, are not needed for this specific calculation.

Question 10

Delta Company sells a single product for $45 per unit with variable costs of $27 per unit. Fixed costs total $144,000 annually. If Delta wants to maintain the same margin of safety in units after increasing fixed costs by $36,000, by how much must the selling price per unit increase, assuming variable costs remain constant?

  1. The selling price must increase by $5.00 per unit to maintain the margin of safety
  2. The selling price must increase by $3.60 per unit to maintain the margin of safety
  3. The selling price must increase by $4.50 per unit to maintain the margin of safety (correct answer)
  4. The selling price must increase by $2.25 per unit to maintain the margin of safety
Explanation: This question tests your understanding of margin of safety and contribution margin analysis in cost-volume-profit (CVP) relationships. When fixed costs change, you need to determine how selling price adjustments affect the margin of safety. First, calculate the original contribution margin: $45−$27=$18\$45 - \$27 = \$18 per unit. The original break-even point is $144,000÷$18=8,000\$144,000 ÷ \$18 = 8,000 units. After the fixed cost increase, new fixed costs become $144,000+$36,000=$180,000\$144,000 + \$36,000 = \$180,000. To maintain the same margin of safety in units, the break-even point must stay at 8,000 units despite higher fixed costs. This requires a higher contribution margin per unit. The new required contribution margin is $180,000÷8,000=$22.50\$180,000 ÷ 8,000 = \$22.50 per unit. Since variable costs remain at $27 per unit, the new selling price must be $\27 + $22.50 = $49.50 . Therefore, the selling price must increase by $49.50 - $45.00 = $4.50 per unit. Answer A (5.00)likelyresultsfromroundingerrorsormiscalculatingthecontributionmarginneeded.AnswerB(5.00) likely results from rounding errors or miscalculating the contribution margin needed. Answer B (3.60) might come from incorrectly dividing the fixed cost increase by something other than the break-even units. Answer D ($2.25) appears to be exactly half the correct answer, suggesting a calculation error where someone divided by the wrong denominator. Study tip: Always work through CVP problems systematically: calculate original break-even, determine the constraint (here, maintaining margin of safety), then work backward to find the required changes. The margin of safety concept frequently appears in managerial accounting scenarios involving operational changes.

Question 11

Theta Industries currently has a margin of safety of 4,000 units and sells 16,000 units annually at $25 per unit with variable costs of $15 per unit. The company is evaluating a plan to automate production, which would increase fixed costs by $45,000 but reduce variable costs to $12 per unit. Under the automation plan, what sales volume would be required to achieve the same margin of safety ratio as currently exists?

  1. Required sales volume would be 17,333 units to maintain the margin of safety ratio
  2. Required sales volume would be 15,600 units to maintain the margin of safety ratio
  3. Required sales volume would be 18,750 units to maintain the margin of safety ratio
  4. Required sales volume would be 16,900 units to maintain the margin of safety ratio (correct answer)
Explanation: Current margin of safety ratio = 4,000 ÷ 16,000 = 25%. Current break-even = 16,000 - 4,000 = 12,000 units. Current fixed costs = 12,000 × ($25 - $15) = $120,000. New fixed costs = $120,000 + $45,000 = $165,000. New contribution margin per unit = $25 - $12 = $13. New break-even = $165,000 ÷ $13 = 12,692 units. To maintain 25% margin of safety ratio: if break-even represents 75% of sales, then total sales = 12,692 ÷ 0.75 = 16,923 units ≈ 16,900 units.

Question 12

Alpha Corp's margin of safety is currently $180,000 in sales dollars. The company's contribution margin ratio is 40% and fixed costs are $96,000. If Alpha wants to achieve a margin of safety ratio of 30%, what must the new sales level be?

  1. $428,571 in total sales to achieve the target margin of safety ratio
  2. $343,000 in total sales to achieve the target margin of safety ratio (correct answer)
  3. $400,000 in total sales to achieve the target margin of safety ratio
  4. $480,000 in total sales to achieve the target margin of safety ratio
Explanation: Break-even sales = Fixed costs ÷ CM ratio = $96,000 ÷ 0.40 = $240,000. If margin of safety ratio = 30%, then margin of safety represents 30% of total sales, meaning break-even represents 70% of total sales. Therefore: Total sales = $240,000 ÷ 0.70 = $342,857, which rounds to $343,000. Verification: Margin of safety = $343,000 - $240,000 = $103,000; Ratio = $103,000 ÷ $343,000 = 30%.

Question 13

The degree of operating leverage for a company is best described as being:

  1. Highest at the break-even point, because the percentage change in profit is infinite.
  2. Undefined at the break-even point, because net operating income is zero. (correct answer)
  3. Constant across all levels of sales for a given cost structure.
  4. Equal to the contribution margin ratio at all levels of sales above break-even.
Explanation: This question tests the conceptual understanding of operating leverage, particularly at the break-even point. The formula for the degree of operating leverage (DOL) is Contribution Margin / Net Operating Income. At the break-even point, by definition, Total Revenue equals Total Costs, and Net Operating Income is zero. Division by zero is mathematically undefined. Therefore, the DOL is undefined at the break-even point. Distractor Rationale:
  • A: While the percentage change from zero profit is infinite, the formula itself becomes undefined. This is a subtle but important distinction.
  • C: This is incorrect. As shown in other problems, DOL decreases as sales move further from the break-even point.
  • D: This confuses two different CVP metrics. The contribution margin ratio (CM/Sales) is not equal to DOL (CM/NOI).

Question 14

A company's degree of operating leverage is 6.0. Its margin of safety is $100,000. Which of the following statements can be deduced without any further information?

  1. The company's fixed costs are $500,000.
  2. The company's contribution margin is $600,000.
  3. The company's net operating income is one-fifth of its contribution margin.
  4. A 10% increase in sales will result in a 60% increase in net operating income. (correct answer)
Explanation: This question tests the fundamental definition of the degree of operating leverage (DOL) versus what can be calculated from it.
  • The definition of DOL is that it is a multiplier that links the percentage change in sales to the percentage change in net operating income (NOI). Therefore, if DOL is 6.0, a 10% increase in sales will result in a 6.0 × 10% = 60% increase in NOI. This statement is true by definition.
  • We cannot determine the absolute dollar values of fixed costs, contribution margin, or net operating income from only the DOL and MOS. For example, if NOI = $20,000, then CM = 6 * $20k = $120k, and FC = $100k. But if NOI = $30,000, then CM = 6 * $30k = $180k, and FC = $150k. Both scenarios are possible. Thus, statements A and B cannot be deduced.
  • Statement C says NOI = (1/5)CM. The relationship is DOL = CM/NOI, so 6.0 = CM/NOI, which means NOI = (1/6)CM. Therefore, statement C is incorrect.

Question 15

A company's contribution margin ratio is 60% and its fixed costs are $180,000. Its degree of operating leverage is 4.0. What is the company's margin of safety percentage?

  1. 15%
  2. 20%
  3. 25% (correct answer)
  4. 33%
Explanation: This is a challenging multi-step problem that requires working from DOL back to sales and break-even information.
  1. Find the total contribution margin (CM):
    • DOL = CM / NOI and NOI = CM - FC
    • 4.0 = CM / (CM - $180,000)
    • 4.0 * (CM - $180,000) = CM
    • 4CM - $720,000 = CM
    • 3CM = $720,000
    • CM = $240,000
  2. Find the current sales level:
    • Sales = CM / CM Ratio = $240,000 / 0.60 = $400,000
  3. Find the break-even sales level:
    • Break-Even Sales = FC / CM Ratio = $180,000 / 0.60 = $300,000
  4. Calculate the margin of safety (MOS) in dollars:
    • MOS $ = Current Sales - Break-Even Sales = $400,000 - $300,000 = $100,000
  5. Calculate the margin of safety percentage:
    • MOS % = MOS $ / Current Sales = $100,000 / $400,000 = 0.25 or 25%.
Distractor Rationale:
  • A: A miscalculation, perhaps confusing the roles of CM and Sales.
  • B: A plausible but incorrect result.
  • D: This is the MOS expressed as a percentage of break-even sales ($100k / $300k).

Question 16

A company's break-even point is 20,000 units. Its margin of safety is 5,000 units. If the contribution margin is $12 per unit, what is the company's degree of operating leverage?

  1. 4.0
  2. 5.0 (correct answer)
  3. 6.0
  4. Cannot be determined from the information given.
Explanation: This problem can be solved by determining the sales level and cost structure from the given information.
  1. Calculate current sales in units: Current Sales = Break-Even Sales + Margin of Safety = 20,000 + 5,000 = 25,000 units
  2. Calculate total contribution margin (CM): Total CM = 25,000 units × $12/unit = $300,000
  3. Calculate net operating income (NOI): NOI = Margin of Safety units × CM per unit = 5,000 units × $12/unit = $60,000
  4. Calculate the degree of operating leverage (DOL): DOL = Total CM / NOI = $300,000 / $60,000 = 5.0
Alternatively, DOL can be calculated as: Current Sales Units / Margin of Safety Units = 25,000 / 5,000 = 5.0 Distractor Rationale:
  • A: This is the ratio of break-even units to margin of safety units (20,000 ÷ 5,000)
  • C: Could result from using total sales dollars incorrectly in the calculation
  • D: Incorrect as sufficient information is provided to solve the problem

Question 17

A company has current sales of $800,000 and a margin of safety percentage of 25%. If total fixed costs are $150,000, what is the company's degree of operating leverage?

  1. 2.00
  2. 2.50
  3. 3.00
  4. 4.00 (correct answer)
Explanation: This is a multi-step problem where you must first use the margin of safety (MOS) information to determine the company's cost structure.
  1. Calculate MOS in dollars: MOS $ = Sales × MOS % = $800,000 × 25% = $200,000.
  2. Calculate break-even sales: Break-Even Sales = Sales - MOS $ = $800,000 - $200,000 = $600,000.
  3. Calculate the contribution margin (CM) ratio: Break-Even Sales = Fixed Costs / CM Ratio. So, $600,000 = $150,000 / CM Ratio. This gives a CM Ratio of $150,000 / $600,000 = 0.25 or 25%.
  4. Calculate total contribution margin: Total CM = Sales × CM Ratio = $800,000 × 25% = $200,000.
  5. Calculate net operating income (NOI): NOI = Total CM - Fixed Costs = $200,000 - $150,000 = $50,000.
  6. Calculate the degree of operating leverage (DOL): DOL = Total CM / NOI = $200,000 / $50,000 = 4.00.
Distractor Rationale:
  • A: This result might be obtained through various calculation errors, such as dividing Sales by CM.
  • B: This is the result of confusing CM with Sales in the DOL formula (800,000/(800,000 / (800,000-$150,000-$600,000) error chain).
  • C: This could result from an error in calculating the CM ratio, for example by dividing fixed costs by current sales.

Question 18

Wayne Enterprises reported a margin of safety of $200,000 and net operating income of $80,000 for the last year. What was the company's contribution margin ratio?

  1. 25%
  2. 30%
  3. 40% (correct answer)
  4. Cannot be determined from the information given.
Explanation: This question tests a key relationship between profit, margin of safety, and the contribution margin ratio. The formula is: Net Operating Income = Margin of Safety in dollars × Contribution Margin Ratio. By rearranging this formula, we can solve for the contribution margin ratio: Contribution Margin Ratio = Net Operating Income / Margin of Safety in dollars Contribution Margin Ratio = $80,000 / $200,000 = 0.40 or 40%. Distractor Rationale:
  • A: This would be the result of inverting the formula (MOS/NOI = 200k/200k/80k = 2.5, which is not a valid ratio).
  • B: A plausible but incorrect percentage.
  • D: This is a common choice for students who do not know the direct relationship between these three items and think that sales or cost data are required.

Question 19

A company has a margin of safety of $150,000. Its net operating income is $45,000 and its sales are $600,000. What are the company's total fixed costs?

  1. $135,000 (correct answer)
  2. $150,000
  3. $180,000
  4. $450,000
Explanation: This multi-step problem requires combining several CVP formulas.
  1. Calculate the Contribution Margin (CM) Ratio: Using the relationship Net Operating Income = Margin of Safety $ × CM Ratio.
    • $45,000 = $150,000 × CM Ratio
    • CM Ratio = $45,000 / $150,000 = 0.30 or 30%.
  2. Calculate the total Contribution Margin:
    • Total CM = Sales × CM Ratio = $600,000 × 30% = $180,000.
  3. Calculate Total Fixed Costs:
    • Fixed Costs = Total CM - Net Operating Income
    • Fixed Costs = $180,000 - $45,000 = $135,000.
Distractor Rationale:
  • B: This is the margin of safety in dollars.
  • C: This is the total contribution margin.
  • D: This is the break-even sales ($600,000 - $150,000).