Question

Cunningham Industries reported actual sales of $2,000,000, and fixed costs of $510,000. The contribution margin ratio is 30%.

Compute the margin of safety in dollars and the margin of safety ratio.

Answer 1

Results are below.

Step-by-step explanation:

Giving the following information:

Actual sales= $2,000,000

Fixed costs= $510,000

Contribution margin ratio= 0.3

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

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

Break-even point (dollars)= 510,000 / 0.3

Break-even point (dollars)= $1,700,000

Now, the margin of safety:

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

Margin of safety= 2,000,000 - 1,700,000

Margin of safety= $300,000

Finally, the margin of safety ratio:

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

Margin of safety ratio= 300,000 / 2,000,000

Margin of safety ratio= 0.15 = 15%