Question

A company revealed the following figures: Sales revenue $2,080,000 Contribution margin $520,000 Net operating income $400,000...

A company revealed the following figures:

Sales revenue $2,080,000
Contribution margin $520,000
Net operating income $400,000

How much is the company's margin of safety in dollars?

Multiple Choice

  • $1,600,000

  • $1,960,000

  • $180,000

  • $1,560,000

Business   Accounting   
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Homework Answers

Answer #1

Net operating income = Contribution margin - Fixed cost

400,000 = 520,000-Fixed cost

Fixed cost = $120,000

Contribution margin ratio = Contribution margin/Sales revenue

= 520,000/2,080,000

= 25%

Break even sales in dollars = Fixed cost /Contribution margin ratio

= 120,000/25%

= $480,000

Margin of safety = Actual sales - Break even sales

= 2,080,000-480,000

= $1,600,000

The company's margin of safety in dollars is $1,600,000

First option is correct.

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