Question

Exercise 5-8 (Algo) Compute the Margin of Safety [LO5-7] Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month's budget appear below: Required:

Answer 1

MarginMargin of safety is the difference between actual sales and breakeven sales. It is the amount by which the sales can fall without causing losses. In this context, Molander Corporation is a distributor of a sun umbrella used at resort hotels. The data concerning the next month's budget is given below:Sales $250,000Variable expenses 125,000Contribution margin $125,000Fixed expenses 100,000Net income $ 25,000The computation of Margin of Safety is shown below:Margin of Safety = Total Sales - Breakeven SalesBreakeven Sales = Fixed Expenses / Contribution Margin= $100,000 / $50,000= $200,000Margin of Safety = $250,000 - $200,000Margin of Safety = $50,000Therefore, the Margin of Safety for Molander Corporation is $50,000.