Question

Margin of Safety

a. If Canace Company, with a break-even point at $960,000 of sales, has actual sales of $1,200,000, 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 $1,875,000, 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

1. The margin of safety in dollars is calculated below: Margin of safety- Actual sales - Break-even sales -$1,200,000-S960,000 - $240,000 The margin of safety as a percentage of sales is calculated below: Margin of safety in dollars Margin of safety (% of sales) Actual sales $240,000 $1,200,000 20% The break-even sale in dollars is calculated below Fixed costs Break-even sales- Contribution margin ratio $1,875,000 100%-80% $1,875,000 2000 |$9.375,000

The amount of actual sales in dollars is calculated below Margin of safety (% of sales) = Margin of safety in dollars Actual sales Actual sales - Break-even sales Actual sales 2090 = Actual sales - $9,375,000 Actual sales 0.20 0.20 x Actual sales-Actual sales - S9,375,000 Actual sales $11,718,750 Therefore, the amount of actual sales in dollars is S11,718,750.