Question

Hartman Co. has fixed costs of $36,000 and a contribution margin ratio of 24%. If expected sales are $200,000, what is the margin of safety as a percentage of sales? a. 6% b. 25% c. 33% d. 50% e. 75%

Answer 1

To calculate the margin of safety as a percentage of sales, first calculate the contribution margin and then the margin of safety. Contribution margin is the sales revenue minus variable costs. The margin of safety is the difference between actual sales and break-even sales divided by actual sales.The correct option is b. 25% .

Step-by-step explanation:

To calculate the margin of safety as a percentage of sales, we need to first calculate the contribution margin and then the margin of safety. Contribution margin is calculated as the sales revenue minus variable costs. In this case, the fixed costs are $36,000 and the contribution margin ratio is 24%.

Contribution margin ratio = (Sales revenue - Variable costs) / Sales revenue

We can rearrange this formula to find the variable costs as a percentage of sales: Variable costs = Sales revenue - (Contribution margin ratio x Sales revenue)

Using the given information, the variable costs are $200,000 - (0.24 x $200,000) = $200,000 - $48,000 = $152,000.

Now, we can calculate the margin of safety as a percentage of sales: Margin of safety = (Actual sales - Break-even sales) / Actual sales

In this case, the actual sales are $200,000 and the break-even sales can be calculated as Fixed costs / Contribution margin ratio.

Break-even sales = $36,000 / 0.24 = $150,000.

Margin of safety = ($200,000 - $150,000) / $200,000 = $50,000 / $200,000 = 0.25 = 25%

The correct option is b. 25% .