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Margin of Safety a. If Canace Company, with a break-even point at $558,900 of sales, has actual sales of $690,000, 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 30%, fixed costs were $1,201,200, and variable costs were 70% of sales, what was the amount of actual sales (dollars)? (Hint: Determine the break-even in sales dollars first.) $

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hyderali230

Answer:

a.

(1)

Margin of Safety = $131,100

(2)

Margin of Safety as % of Sales = 19%

b.

Actual Sales = $5,720,000

Explanation:

Margin of safety is the value of sales by which the business is safe from the loss. It means all the made in excess of breakeven point is the margin of safety.

a.

(1)

Margin of Safety = Actual Sales - Breakeven point = $690,000 - $558,900 = $131,100

(2)

Margin of Safety as % of Sales = (Margin of Safety / Actual Sales ) x 100 = 19%

b.

First of all calculate the Contribution margin ratio

Contribution margin ratio = 100% - Variable cost ratio = 100% - 70% = 30%

Breakeven Sales = Fixed cost / Contribution margin ratio = $1,201,200 / 30% = $4,004,000

As the margin of safety is 30% of actual sales, so the breakeven sales i 70% ( 100% - 30% ) of Actual Sales

Actual Sales = Breakeven Sales / Breakeven sales to acual sales ratio

Actual Sales = $4,004,000 / 70%

Actual Sales = $5,720,000

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