Question

Arthur corporation has a margin of safety percentage of 25% based on actual sales. the break-even point is $300.000 and the Variable expenses are 40% of sales. Given this information, the actual profit is:

Answer 1

Margin of safety % = Actual sales - Break even sales / Actual sales * 100

Let actual sales be X

25% = X - $300,000 / X

25% X = X - $300,000

0.25 X = X - 300,000

0.25X - X = -300,000

0.75X = 300,000

X = $300,000/0.75 = $400,000

Hence actual sales is $400,000

At break even point, Fixed cost = Contribution margin

Contribution margin = Break even sales*(100-40)%

Contribution margin = $300,000 * 60% = $180,000

Fixed cost = $180,000

Actual profit = Contribution margin - Fixed cost

Actual profit = $400,000*60% - $180,000

Actual profit = $240,000 - 180,000 = $60,000

Hence, Actual profit is $60,000