Question

If Canace Company, with a break-even point at $402,000 of sales, has actual sales of $600,000, 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 40%, fixed costs were $1,735,200, and variable costs were 60% of sales, what was the amount of actual sales (dollars)? (Hint: Determine the break-even in sales dollars first.) $

Answer 1

1) Margin of Safety ( in Dollars) = Actual Sales - Break Even Sales

= $ 600,000 - $ 402,000

= $ 198,000

2) Margin of Safety (percentage of sales) = (Actual Sales - Break Even Sales) / Actual Sales *100

= $ 600,000 - $ 402,000 / $ 600,000 *100

= $ 198,000/ $ 600,000 *100

= 33%

b. Margin of Safety (percentage of sales) = (Actual Sales - Break Even Sales) / Actual Sales *100

40 % = (Actual Sales - Break Even Sales) / Actual Sales

40 % = ( Actual Sales - 4,338,000) / Actuals Sales

or 40 % * Actual Sales = Actual Sales - 4,338,000

or 0.4 Actual Sales = Actual Sales - 4,338,000

or $ 4,338,000 = Actual Sales -0.4 Actual Sales

or $ 4,338,000 = 0.6 Actual Sales

or Actual Sales = 4,338,000 / 0.6

= $ 7,230,000

Hence the correct answer is $ 7,230,000

Note :

Contribution Margin ratio = ( 100 % - Variable Cost ratio)

= ( 100 % - 60% )

= 40%

Break Even Sales = Fixed Cost / Contribution Margin ratio

= $ 1,735,200 / 40%

= $ 4,338,000