Question

a. If Canace Company, with a break-even point at $372,600 of sales, has actual sales of $460,000, 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 Canace Company was 20%, fixed costs were $913,600, and variable costs were 80% of sales, what was the amount of actual sales (dollars)? $____________________

Answer 1

a.

Break even sales = $372,600

Actual sales = $460,000

1.

Margin of safety in dollars = Actual sales - Break even sales

= 460,000-372,600

= $87,400

2.

Margin of safety in % = Margin of safety in dollars / Actual sales

= 87,400/460,000

= 19%

b.

Margin of safety = 20%

Fixed cost = $913,600

Variable cost = 80% of sales

Since variable cost is 80% of sales, hence contribution margin is 20%

Break even sales = Fixed cost/ Contribution margin ratio

= 913,600/20%

= $4,568,000

Since margin of safety is 20%, hence break even sales must be 80% of actual sales.

Break even sales = Actual sales x 80%

4,568,000 = Actual sales x 80%

Actual sales = $5,710,000

Kindly comment if you need further assistance.

Thanks‼!