Question

"If a business had a capacity of $8,000,000 of sales, actual sales of $5,000,000, break-even sales of $3,500,000, fixed costs of $1,400,000, and variable costs of 60% of sales, what is the margin of safety expressed as a percentage of sales

Answer 1

30%

Step-by-step explanation:

Given that,

Sales = $8,000,000

Actual sales = $5,000,000

Break even sales = $3,500,000

Fixed cost = $1,400,000

Variable costs:

= 60% of sales

= 0.6 × $8,000,000

= $4,800,000

The margin of safety is the reduction in sales that can occur before the break-even point of a business is reached.

Margin of safety:

= Actual sales - Break even sales

= $5,000,000 - $3,500,000

= $1,500,000

Margin of safety as a percentage of sales:

= (Margin of safety ÷ Actual Sales) × 100

= ($1,500,000 ÷ $5,000,000) × 100

= 0.3 × 100

= 30%

Answer 2

30%

Step-by-step explanation:

The computation of margin of safety is given below:-

Actual Sales = $5,000,000

Break-even sales = $3,500,000

Margin of safety =Actual Sales - Break even sales

= $5,000,000 - $3,500,000

= $1,500,000

Margin of safety in percentage = Margin of safety ÷ Actual Sales × 100

= $1,500,000 ÷ $5,000,000 × 100

= 30%

Therefore for computing the Margin of safety in percentage we simply divide actual sales by margin of safety and here we will not considered Sales $8,000,000 and variable costs 60%.