Question

Margin of Safety a. If Canace Company, with a break-even point at $416,100 of sales, has actual sales of $ 730,000, 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 20%, fixed costs were $1,404,800, and variable costs were 80% of sales, what was the amount of actual sales (dollars)? (Hint: Determine the break-even in sales dollars first.)

Answer 1

a)

Actual sales = $730,000

Break even sales = $416,100

1.

Margin of safety = Actual sales - Break even sales

= 730,000 - 416,100

= $313,900

2.

Margin of safety (in percentage) = Margin of safety/Actual sales

= 313,900/730,000

= 43%

Margin of safety in dollar	$313,900
Margin of safety (in percentage)	43%

b)

Margin of safety = 20%

Fixed cost = $1,404,800

Variable cost = 80% of sales

Contribution margin ratio = 20%

Break even sales = Fixed cost/Contribution margin ratio

= 1,404,800/20%

= $7,024,000

Since margin of safety is 20%, hence break even will occur at 80% of actual sales

Actual sales = Break even sales x 100/80

= 7,024,000 x 100/80

= $8,780,000

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