Question

Henderson Co. has fixed costs of $21,000 and a contribution margin ratio of 30%. If expected sales are $100,000, what is the margin of safety as a percent of sales?

Answer 1

Margin of safety as percentage of sales is 30%

Step-by-step explanation:

Margin of safety is defined as the difference between the instrinsic value of a stock and it's market price. It also measures how much output can be generated by a business before it reaches its breakeven point.

The fixed fixed cost is given as $21,000

Contributing margin ratio is 30%

Breakeven point = Fixed cost/Contributing margin ratio

Breakeven point= 21,000/0.3= $70,000

Margin of safety= Sales revenue - Breakeven

Margin of safety=100,000- 70,000= $30,000

We are asked to calculate margin of safety as a percentage of sales= (30,000/100,000)*100= 30%