Question

The following is Addison Corporation's contribution format income statements for last month. The company has no beginning or ending inventories. A total of 10,000 units were produced and sold last month. The following is last month's contribution format income statement:

Sales (10,000 units)................. $1,200,000
Variable expenses .................. $800,000
Contribution margin ............... $400,000
Fixed expenses ...................... $240,000
Net operating income ........... $160,000

Determine the margin of safety?

Answer 1

The margin of safety is $479,927.92.

Step-by-step explanation:

The margin of safety can be determined by calculating the difference between the actual sales and the breakeven sales. Breakeven sales is the point where the company's total sales equal its total costs, resulting in zero profit or loss. To calculate the breakeven sales, we can divide the fixed expenses by the contribution margin ratio. The contribution margin ratio is calculated by dividing the contribution margin by the total sales. In this case, the contribution margin ratio can be calculated as ($400,000 / $1,200,000) = 0.3333. Therefore, the breakeven sales can be calculated as ($240,000 / 0.3333) = $720,072.08.

To determine the margin of safety, we need to subtract the breakeven sales from the actual sales. The actual sales in this case are $1,200,000. Therefore, the margin of safety can be calculated as ($1,200,000 - $720,072.08) = $479,927.92.