The following CVP income statements are available for Blanc Company and Noir Company. Blanc Company Noir Company
Sales $450,000 $450,000
Variable costs 270,000 225,000
Contribution margin 180,000 225,000
Fixed costs 162,000 207,000
Net income $18,000 $18,000
1. Compute the break-even point in dollars for each company.
2. Compute margin of safety ratio for each company.
3. Compute the degree of operating leverage for each company.

Answer and Explanation:

The computation is shown below:

As we know that  

Contribution Margin Ratio is

= contribution margin ÷sales

For Blanc Company

 = 180000 ÷ 450000

= 0.40

For Noir Company

 = 225000 ÷ 450000

= 0.50

a.  

Break-even point = Fixed Costs ÷  Contribution Margin Ratio

For Blanc Company

 = 162000 ÷ 0.40

= $405,000

For Noir Company

 = $207000 ÷ 0.50

= $414000

2.  

Margin of Safety Ratio = (Actual Sales - Break-even Sales) ÷ Actual Sales

For Blanc Company

= (450000 - 405000) ÷ 450000

= 10%

For Noir Company

= (450000 - 414000)  ÷ 450000

= 8%

3.

Degree of Operating Leverage = Contribution Margin  ÷  Net Income

For Blanc Company

= 180000  ÷  18000

=  10

For Noir Company

= 225000  ÷  18000

= 12.5

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