Question

Margin of Safety a. If Canace Company, with a break-even point at $396,000 of sales, has actual sales of $660,000, 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 40%, fixed costs were $2,006,400, and variable costs were 60% of sales, what was the amount of actual sales (dollars)? (Hint: Determine the break-even in sales dollars first.)

Answer 1

Answers

• Requirement [a]

Part 1
Margin of Safety in $ = Total Sales – Break even sales = 660000 – 396000 = $ 264,000
Margin of Safety % = Margin of safety sales / Total Sales = ($264000 / 660000) x 100 = 40%

• Requirement [b]
  >Contribution margin ratio = 100% - 60% = 40% of sales
  >Break even sales = $ 2006400 fixed cost / 40% = 5,016,000
  >Margin of Safety = 40% of sales, this means that Break even sales is 60% of sales.
  Amount of Actual sales = $ 5016000 / 60%
  = $ 8,360,000 Answer