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Answer :
Final answer:
To calculate Dogwood Company's budgeted operating income, first calculate the break-even point. Then, use the margin of safety percentage to find the budgeted sales, and plug in the values to calculate the budgeted operating income.
Explanation:
To calculate Dogwood Company's budgeted operating income, we need to first calculate the break-even point. The break-even point is the point at which the company neither makes a profit nor incurs a loss. From the information given, we know that the break-even sales are $500,000 and the variable costs are 60% of sales. Therefore, the total fixed costs can be calculated as ($500,000 / (1 - 0.6)) = $1,250,000.
The margin of safety percentage can be calculated as (Budgeted Sales - Break-even Sales) / Budgeted Sales * 100. Since the margin of safety is 20%, we can plug in the values to find the budgeted sales: (Budgeted Sales - $500,000) / Budgeted Sales * 100 = 20%. Solving for Budgeted Sales gives us $625,000.
Finally, we can calculate the budgeted operating income using the formula: Budgeted Operating Income = Budgeted Sales - Total Variable Costs - Total Fixed Costs. Plugging in the values, we get $625,000 - (0.6 * $625,000) - $1,250,000 = $50,000.
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