Question

9 Margin of Safety

a. If Canace Company, with a break-even point at $312,800 of sales, has actual sales of $460,000, 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 45%, fixed costs were $1,655,775, and variable costs were 55% of sales, what was the amount of actual sales (dollars)?
(Hint: Determine the break-even in sales dollars first.)
$

Answer 1

a).

1. Margin Of Safety ( in Dollars) = Actual Sales - Break Even Sales

= $460,000 - $312,800

= $ 147,200

2. Margin of Safety ( as a percentage of sales) = Actual Sales- Break Even Sales / Actual Sales *100

= [( $460,000 - $312,800) / $460,000] *100

= 32%

b).

Variable costs = 55% of sales

Contribution Margin Ratio = 100% - 55 % = 45% of Sales

Break Even Sales = Fixed Cost / Contribution Margin Ratio

= $1,655,775 / 45%
= $3,679,500

Margin of Safety ( as a percentage of sales) = (Actual Sales- Break Even Sales) / Actual Sales

45% = (Actual Sales - $3,679,500 / Actual Sales)

Let the Actual Sales be $ x

0.45 = $ x - $ 3,679,500 / $ x

or 0.45 x = $ x - $ 3,679,500

or $ 3,679,500 = $ x - $ 0.45x

or $ 3,679,500 = $ 0.55 x

or x = $ 3,679,500 /0.55

or x = $6,690,000

Hence, Actual Sales (dollars) is $ 6,690,000