Question

Henderson Co. has fixed costs of $30,000 and a contribution margin ratio of 25%. If expected sales are $200,000, what is the margin of safety as a percent of sales

Answer 1

Margin of safety ratio= 0.4 = 40%

Step-by-step explanation:

Giving the following information:

Henderson Co. has fixed costs of $30,000 and a contribution margin ratio of 25%.

Sales= $200,000

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

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

Break-even point (dollars)= 30,000 / 0.25

Break-even point (dollars)= $120,000

Now, the margin of safety ratio:

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

Margin of safety ratio= (200,000 - 120,000) / 200,000

Margin of safety ratio= 0.4