Question

Market Sales had $1,200,000 in sales last month. The variable cost ratio was 60% and operating profits were $80,000. What is Market's margin of safety in sales dollars

Answer 1

$200,000

Step-by-step explanation:

The computation of the margin of safety in sales dollars is show below:

Margin of safety in sales dollars = Expected sales - break even sales

where,

Expected sales = $1,200,000

Break even sales equal to

= Fixed cost ÷ Contribution margin ratio

where,

The contribution margin ratio is

= 100 - 40%

= 60%

And, the fixed cost is

Sales $1,200,000

Less: Variable cost -$720,000

Contribution margin $480,000

Less: Fixed cost -$400,000

Operating profits $80,000

So, the break even sales is

= $400,000 ÷ 40%

= $1,000,000

So, the margin of safety is

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

= $200,000