Question

If Canace Company, with a break-even point at $324,500 of sales, has actual sales of $590,000, 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.

b. If the margin of safety for Canace Company was 40%, fixed costs were $2,028,000, 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

(a)

Break even sales = $ 324,500

Actual sales = $ 590,000

Margin of safety = Actual sales - Break even sales

= 590,000 - 324,500

= $ 265,500

Margin of safety (%) = Margin of safety x 100

Actual sales

= 265,500 x 100

590,000

= 45%

(b)

Margin of safety = 40%

Fixed cost = $ 2,028,000

Variable costs = 60% of sales

Actual sales = ?

If variable cost ratio is 60%, then contribution margin ratio must be 40%.

Break even sales = Fixed cost/Conribution margin ratio

= 2,028,000/40%

= $ 5,070,000

If margin of safety is 40%, then Break even sales must be 60% of actual sales.

Break even sales = Actual sales x 60%

5,070,000 = Actual sales x 60%

Actual sales = 5,070,000 x 100/60

= $ 8,450,000