Question

Our company's GAAP income statement includes the following line items:
Revenues
Gross Margin
Net Operating Income
$3,600,000 $400,000 $150,000
We don't have any inventories.
30% of our total manufacturing costs are fixed. Variable Selling & Administrative (S&A) expenses equal 5% of sales (the rest of
S&A expenses are fixed).
Our margin of safety is closest to (Do not round intermediate calculations.)
A. $3,142,373
B. $1,350,000
C. $400,742
D. $150,000
E. $ 457,627

Answer 1

Answer- Our margin of safety is closest to = $400742 (Option C).

Explanation- Margin of safety = Net operating income/ Contribution margin ratio

= $150000/37.430555555%

= $400742

Where- Contribution margin ratio = (Contribution margin/Total revenues)*100

= ($1347500/$3600000)*100

= 37.430555555%

Where-Contribution margin = Total revenues- Total variable costs

= $3600000 - $2252500

= $1347500

Total variable costs = Variable manufacturing costs+ Variable selling & administrative expenses

= $2240000+$12500

= 2252500

Where- Variable manufacturing costs = (Sales – Gross margin)*70%

= ($3600000 - $400000)*70%

= $2240000

Variable selling & administrative expenses = (Gross margin - Net operating income)*5%

= ($400000 - $150000)*5%

= $12500