Question

MC Qu. 84 Henderson Co. has fixed costs of... Henderson Co. has fixed costs of $32,000 and a contribution margin ratio of 25%. If expected sales are $200,000, what is the margin of safety as a percent of sales

Answer 1

Margin of safety ratio= 0.36

Step-by-step explanation:

Giving the following information:

Fixed costs= $32,000

Contribution margin ratio= 25%

Expected sales= $200,000

First, we need to calculate the break-even point in dollars:

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 32,000 / 0.25

Break-even point (dollars)= $128,000

Now, the margin of safety ratio:

Margin of safety ratio= (current sales level - break-even point)/current sales level

Margin of safety ratio= (200,000 - 128,000) / 200,000

Margin of safety ratio= 0.36