Margin of Safety Harold McWilliams owns and manages a general merchandise store in a ruralarea of Virginia. Harold sells appliances, clothing, auto parts, and farming equipment, among a wide[LO 9-2, 9-3][LO 9-2, 9-3][LO 9-1, 9-2, 9-3][LO 9-5]Final PDF to printerblo17029_ch09_314-354.indd 343 02/19/18 09:08 AMChapter 9 Short-Term Profit Planning: Cost-Volume-Profit (CVP) Analysis 343variety of other types of merchandise. Because of normal seasonal and cyclical fluctuations in thelocal economy, he knows that his business will also have these fluctuations, and he is planning to useCVP 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 costpaid for the merchandise he sells, while operating costs represent rent, insurance, and salaries, whichare entirely fixed.Sales $650,000Cost of merchandise sold 422,500Contribution margin 227,500Operating costs 105,000Operating profit $122,500Required1. What is Harold’s margin of safety (MOS) in dollars? What is the margin of safety (MOS) ratio?2. Of what managerial significance are the measures calculated in requirement 1?3. What is Harold’s margin of safety (in dollars) and operating profit if sales should fall to $500,000?
Margin of Safety 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
[LO 9-2, 9-3]
[LO 9-2, 9-3]
[LO 9-1, 9-2, 9-3]
[LO 9-5]
Final PDF to printer
blo17029_ch09_314-354.indd 343 02/19/18 09:08 AM
Chapter 9 Short-Term Profit Planning: Cost-Volume-Profit (CVP) Analysis 343
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, which
are entirely fixed.
Sales $650,000
Cost of merchandise sold 422,500
Contribution margin 227,500
Operating costs 105,000
Operating profit $122,500
Required
1. What is Harold’s margin of safety (MOS) in dollars? What is the margin of safety (MOS) ratio?
2. Of what managerial significance are the measures calculated in requirement 1?
3. What is Harold’s margin of safety (in dollars) and operating profit if sales should fall to $500,000?
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