Question

Margin of Safety

a. If Fama Company, with a break-even point at $525,600 of sales, has actual sales of $720,000, 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 35%, fixed costs were $1,410,500, and variable costs were 65% of sales, what was the amount of actual sales (dollars)?
(Hint: Determine the break-even in sales dollars first.)
$

Answer 1

• All working forms part of the answer
• Requirement (a)

A	Actual Sales	$720,000
B	Break Even Point sales	$525,600
C=A-B	Margin of Safety sales in Dollars	$194,400
D=C/A	Margin of Safety sales in % of sale [(194400/720000) x 100]	27%

• Requirement (b)

A	Variable cost % of sale	65%
B= 100% - A	Contribution margin ratio will be	[100% - 65%] 35%
C	Fixed Cost	$1,410,500
D=C/B	Break Even point Sales in dollars [1410500/35%]	$4,030,000
E	Margin of Safety % of actual sale	35%
F=100% - E	Break Even point sales % of actual sale	65%
G=D/F	Actual Sales will be [4030000/65%]	$6,200,000