Question

A company revealed the following figures: Sales revenue $2,240,000 Contribution margin $560,000 Net operating income $410,000 How much is the company's margin of safety in dollars

Answer 1

The company's margin of safety in dollars is $1,640,000 .

Step-by-step explanation:

Margin of Safety is the amount in units or dollars by which sales may fall before a Company starts making a loss.

The first step is to calculate break even point in dollar sales.

Break even point in dollar sales = Fixed Costs / Contribution Margin Ratio

Where,

Fixed Costs = Contribution margin - Operating Income

= $560,000 - $410,000

= $150,000

Contribution Margin Ratio = Contribution margin ÷ Sales revenue

= $560,000 ÷ $2,240,000

= 0.25

Thus,

Break even point in dollar sales = $150,000 / 0.25

= $600,000

Margin of Safety = Expect Sales - Break Even Sales

= $2,240,000 - $600,000

= $1,640,000