## Melton Inc. has sales of \$1,750,000, and the break-even point in sales dollars is \$875,000.

Margin of safety
Melton Inc. has sales of \$1,750,000, and the break-even point in sales dollars is \$875,000. Determine the company’s margin of safety as a percent of current sales.
Junck Company has sales of \$550,000, and the break-even point in sales dollars is \$385,000. Determine the company’s margin of safety as a percent of current sales.

To calculate the margin of safety, subtract the current breakeven point from sales, and divide by sales. The formula is:

Current Sales Level – Breakeven Point
Current Sales Level

The amount of this buffer is expressed as a percentage

(1,750,000-875,000)/1,750,000

The company’s margin of safety as a percent of current sales: 50% i.e \$875,000

## Carlin and Marley, an accounting firm, provides consulting and tax planning services.

Carlin and Marley, an accounting firm, provides consulting and tax planning services. For many years, the firm’s total administrative cost (currently \$285,000) has been allocated to services on this basis of billable hours to clients. A recent analysis found that 55% of the firm’s billable hours to clients resulted from tax planning services, while 45% resulted from consulting services.

The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows:

 Staff Support \$ 205,000 In-house computing charges 55,000 Miscellaneous office costs 25,000 Total \$ 285,000

A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting clients served totaled 35% of the total client base, consumed 30% of the firm’s computer hours, and accounted for 20% of the total client transactions.

If Carlin and Marley switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

Administrative cost chargeable to consulting services = \$93,250
Staff Support = \$205000 x 35% = \$71750
In house computing charges = \$55000 x 30% = \$16500
Misc. office costs = \$25000 x 20% = \$5000

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## Nance Company owns 40% interest in the shares of Finley Corporation.

Nance Company owns 40% interest in the shares of Finley Corporation. During the year,Finley pays \$25,000 in dividends, and reports \$100,000 in net income. Nance Company’sinvestment in Finley will increase by

a.\$25,000.
b.\$40,000.
c.\$32,000.
d.\$30,000.

ANSWER: The investor reports his or her portion of the investee’s net income using the equity method, in this case 40% of \$100,000 = \$40,000.

## Osaka Co. acquired a 10% interest in Chen Corp. on December 31, 2013 for HK\$3,780,000.

Osaka Co. acquired a 10% interest in Chen Corp. on December 31, 2013 for HK\$3,780,000. During 2014, Chen had net income of HK\$2,400,000 and paid cash dividends of HK\$600,000. Osaka’s 2014 income statement will report

a. dividend income of HK\$60,000.
b. investment income of HK\$180,000.
c. investment income of HK\$240,000.
d. cannot be determined from the information given.

Step-by-Step explanation

Osaka’s share of Chen’s net income for 2014 is 10% × HK\$2,400,000 = HK\$240,000.

Osaka’s share of Chen’s cash dividends for 2014 is 10% × HK\$600,000 = HK\$60,000.

Osaka’s investment income for 2014 is therefore HK\$240,000 – HK\$60,000 = HK\$180,000.