Question

Margin of Safety

a. If Canace Company, with a break-even point at $245,100 of sales, has actual sales of $430,000, 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 40%, fixed costs were $1,363,200, and variable costs were 60% of sales, what was the amount of actual sales (dollars)?
(Hint: Determine the break-even in sales dollars first.)
$

11. PR.19-01A

Classify Costs

Seymour Clothing Co. manufactures a variety of clothing types for distribution to several major retail chains. The following costs are incurred in the production and sale of blue jeans:

Required:

Identify each cost listed below as variable costs, fixed costs, or mixed cost.

A. Shipping boxes used to ship orders
B. Consulting fee of $200,000 paid to industry specialist for marketing advice
C. Straight-line depreciation on sewing machines
D. Salesperson's salary, $10,000 plus 2% of the total sales
E. Fabric
F. Dye
G. Thread
H. Salary of designers
I. Brass buttons
J. Legal fees paid to attorneys in defense of the company in a patent infringement suit, $50,000 plus $87 per hour
K. Insurance premiums on property, plant, and equipment, $70,000 per year plus $5 per $30,000 of insured value over $8,000,000
L. Rental costs of warehouse, $5,000 per month plus $4 per square foot of storage used
M. Supplies
N. Leather for patches identifying the brand on individual pieces of apparel
O. Rent on plant equipment, $50,000 per year
P. Salary of production vice president
Q. Janitorial services, $2,200 per month
R. Wages of machine operators
S. Electricity costs of $0.10 per kilowatt-hour
T. Property taxes on property, plant, and equipment

Answer 1

Answer to Question 1:

Answer of Part a:

Margin of Safety in dollars = Actual Sales - Breakeven Sales
Margin of Safety in dollars = $430,000 - $245,100
Margin of Safety in dollars = $184,900

Margin of Safety as percentage = Margin of Safety in Dollars / Actual sales
Margin of Safety as percentage = $184,900 / $430,000
Margin of Safety as percentage = 0.43 or 43%

Answer of Part b:

Contribution Margin Ratio = 100% - Variable Cost Ratio
Contribution Margin Ratio = 100% - 60%
Contribution Margin Ratio = 40%

Breakeven Sales = Fixed Costs / Contribution Margin Ratio
Breakeven Sales = $1,363,200 / 0.40
Breakeven Sales = $3,408,000

Margin of Safety as percentage = (Actual Sales - Breakeven Sales) / Actual Sales
0.40 = (Actual Sales - $3,408,000) / Actual Sales
0.40 * Actual Sales = Actual Sales - $3,408,000
0.60 * Actual Sales = $3,408,000
Actual Sales = $5,680,000