Question

Margin of Safety

a. If Canace Company, with a break-even point at $203,500 of sales, has actual sales of $370,000, what is the margin of safety expressed (1) in dollars and (2) as a percentage of sales? Round the percentage to the nearest whole number.

1. $

2.   %

b. If the margin of safety for Canace Company was 20%, fixed costs were $1,059,200, and variable costswere 80% of sales, what was the amount of actual sales (dollars)?
(Hint: Determine the break-even in sales dollars first.)

Answer 1

Solution a:

(1) Margin of Safety Expressed In Dollars

=Actual Sales- Break Even Sales

=$370,000 - $203,500

=$ 166,500 (Answer)

(2) Margin of Safety Expressed as percentage of sales

= Margin of Safety in Dollars / Actual Sales X 100

=$ 166,500 / $370,000 X 100

=45% (Answer)

Solution b:         First we will calculate PV ratio

PV Ratio = 100- % of Variable cost on sales

PV Ratio = 100- 80%

PV Ratio = 20%

Break Even Sales (in dollars)

= Fixed cost / PV Ratio

= $1,059,200 / 20%

=$ 5,296,000

With a given Margin of Safety of 20%, Break even sales= 80% of Actual Sales

So, $ 5,296,000 = 80% of Actual Sales

Actual Sales = $ 5,296,000 / 80%

Actual Sales = $ 6,620,000 (Answer)

Verification:

Actual Sales $ 6,620,000

Less: 20% Margin of Safety: ($ 1,324,000)

Break even sales                     $ 5,296,000

Less 80% Variable cost:          ($4,236,800)

Fixed Cost                                  $ 1,059,200