Question

Awtis Corporation has a margin of safety percentage of 20% based on its actual sales. The break-even point is $200,000 and the variable expenses are 45% of sales. Given this information, the actual profit is

• $62,500

• $27,500

• $2,500

• $22,000

Answer 1

Computation of actual profit:

Margin of safety in % of sales = 20%

Break Even sales = $200,000

Margin of safety in dollar terms = Sales - Break Even sales and

Margin of safety as percentage of sales = Margin of safety in dollar terms/sales *100

or Margin of safety as percentage of sales = ( Sales - Break Even sales)/ Sales * 100

20 = (Sales - $200,000)/Sales*100

(Sales - $200,000)/Sales = 0.20

Sales - $200,000 = 0.20 Sales

0.8 Sales = $200,000

Therefore Sales = $250,000

At break even point the company does not have any profit or loss. All its fixed cost and variable cost are considered while calculating break even sales.

Therefore, profit = (Sales - Break Even Sales)* Contribution Margin

Contribution Margin = 100% - Variable Cost in % = 100% - 45% = 55%

Therefore, profit = ($250,000 - $200,000)*55% = $27,500