Question

Margin of Safety

a. If Canace Company, with a break-even point at $518,500 of sales, has actual sales of $850,000, 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 35%, fixed costs were $1,676,675, 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

a) 1)margin of safety in dollars

actual sales - break even sales = margin of safety in dollars

= $850000 - $518500 = $331500

2)margin of safety as a percentage of sales

= $331500/$850000×100 = 39%

b) actual sales

Contribution margin ratio = sales margin ratio- variable ratio

= 100% - 65% = 35%

break even point in dollars = fixed expenses/contribution margin ratio

= $1676675/35% = $4790500

actual sales = break even sales in dollars + margin of safety percentage

= $4790500+35% = $6467175

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