Question

If Fama Company, with a break-even point at $489,100 of sales, has actual sales of $670,000, 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 Watkins Company was 40%, fixed costs were $1,644,000, and variable costs were 60% of sales, what was the amount of actual sales (dollars)?

(Hint: Determine the break-even in sales dollars first.) $

Answer 1

Answer- 1)-The company’s margin of safety in dollars is = $180900.

Explanation- Margin of safety in dollars =Sales – Break even sales

= $670000 - $489100

= $180900

2)- The company’s margin of safety as a percentage of its sales is = (Margin of safety sales in dollars/Total sales in dollars)*100

= ($180900/$670000)*100

= 27%

Answer-b)- Actual amount of sales in dollars = $10275000.

Explanation- Actual sales in dollars = Break-even sales in dollars/Contribution margin ratio

= $4110000/40%

= $10275000

Where- Break-even sales = Fixed costs/Contribution margin ratio

= $1644000/40%

= $4110000

Where- Contribution margin ratio = 1 – Variable cost ratio

= 1- 0.60

= 0.40 or 40%