Question

EX 2-14 Margin of safety

Obj.5
a. If Canace Company, with a break-even point at $960,000 of sales, has actual sales of $1,200,000,
what is the margin of safety expressed (1) in dollars and (2) as a percentage of sales?
b. If the margin of safety for Canace Company was 20%, fixed costs were $1,875,000, and variable
costs were 80% of sales, what was the amount of actual sales (dollars)? (Hint: Determine the break-
even in sales dollars first.)

Answer 1

Step-by-step explanation:

a. The margin of safety will be calculated first and this will be:

= Actual sales - Break even sales

= $1,200,000 - $960,000

= $240,000

The margin of safety expressed as a percentage of sales will then be:

= 240,000/1200000 × 100

= 1/5 × 100

= 20%

b. Firstly, we have to calculate the break even sales which will be:

= Fixed cost / Contribution margin ratio

= 1875000 / (100% - 80%)

= 1875000/20%

= 1875000/0.2

= $9,375,000

Then, to calculate the actual sales goes thus:

% Margin of safety = Margin of safety / Actual sales.

20% = (Actual sales - 9375000) / Actual sales

0.2 × Actual sales = Actual sales - 9375000

Actual sales = $11,718,750