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James House is planning on starting a cleaning services business but has not decided whether he should focus on residential clients or commercial clients
James House is planning on starting a cleaning services business but has not decided whether he should focus on residential clients or commercial clients. His estimates of revenue, variable expenses, and fixed expenses are shown below. Revenue Variable expense Fixed expense Residential $ 65 per hour $ 39 per hour $ 4,875 per month Commercial $ 75 per hour $ 30 per hour $ 6,300 per month Required:
1. At what volume of hours per month will James be indifferent between focusing on residential versus commercial clients?
2. Calculate the number of break even hours for residential clients and commercial clients. (Round your answers to 1 decimal place.) Break-even hours for residential clients hours Break even hours for commercial clients hours
3. Assume that James decides to focus on commercial clients and his business is operating at 185 hours per month. Calculate the margin of safety both in dollars and as a percentage of sales. (Round percentage answer to 1 decimal place.) Margin of safety (in dollars) Margin of safety as a percentage of sales %
Expert Solution
| 1) | |||||||||
| Cost Indifference Point = Differential fixed cost/Differential variable cost per unit = $6300-4875 / $39-30 | |||||||||
| = | 158.33 hours or 158 hours | ||||||||
| 2) Breakeven hours = Fixed cost / contribution margin per unit | |||||||||
| Residential clients = $4875 / $65-39 = 187.5 hours | |||||||||
| Commercial clients = $6300/ $75-30 = 140 hours | |||||||||
| 3) Margin of saftey | |||||||||
| Formula as % os sales = Current level of sales - Breakeven sales / Current level sales | |||||||||
| = | 185 - 140/185 = 24.32 % | ||||||||
| Margin of safety in dollar = (185 hours - 140 hours )*75 = $3,375 | |||||||||
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