Question

eBook Show Me How Calculator Margin of Safety a. If Canace Company, with a break-even point at $369,200 of sales, has actual sales of $520,000, what is the margin of safety expressed (1) in dollars and (2) as a percentage of sales? Round the percentage to the nearest whole number 1. $ 2. % b. If the margin of safety for Canace Company was 25%, fixed costs were $1,496,250, and variable costs were 75% of sales, what was the amount of actual sales (dollars)? (Hint: Determine the break-even in sales dollars first.) Check My Work 2 more Check My Work uses remaining < Previous

Answer 1

a. Compute margin of safety in dollars and as a percentage of sales as follows:

1. Margin of safety in dollars            = Actual sales − Break-even sales

= $520,000 − $369,200

= $150,800     

2. Margin of safety as percentage     = (Margin of safety in dollars ÷ Actual Sales) × 100

= ($150,800 ÷ $520,000) × 100                     

= 29%

b. Compute actual sales as follows

            Break-even sales dollars          = Fixed costs ÷ (1 − Variable cost ratio)

                                                            = $1,496,250 ÷ (1 – 75%)

                                                            = $1,496,250 ÷ 25%

                                                            = $5,985,000

            Actual sales     = Break-even sales in dollars ÷ (1 – Margin of safety ratio)

                                    = $5,985,000 ÷ (1 – 25%)

                                    = $5,985,000 ÷ 75%

                                    = $7,980,000