Question

1. If Canace Company, with a break-even point at $283,200 of sales, has actual sales of $480,000, what is the margin of safety expressed (1) in dollars and (2) as a percentage of sales?
2. If the margin of safety for Canace Company was 40%, fixed costs were $1,725,600, and variable costs were 60% of sales, what was the amount of actual sales (dollars)?

Answer 1

Answer:

Instructions are below.

Explanation:

1) Canace Company:

break-even point= $283,200

Actual sales= $480,000

To calculate the margin of safety, we need to use the following formula:

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

Margin of safety= 480,000 - 283,200= $196,800

Now, the margin of safety ratio:

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

Margin of safety ratio= 196,800 / 480,000

Margin of safety ratio= 0.41

2)

Margin of safety ratio= 0.40

Fixed costs= $1,725,600

Variable costs were 60% of sales.

First, we need to calculate the contribution margin ratio:

contribution margin ratio= 1 - variable costs ratio

contribution margin ratio= 0.4

Now, we can calculate the break-even point in dollars:

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

Break-even point (dollars)= 1,725,600/0.4

Break-even point (dollars)= $4,314,000

Now, current sales:

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

0.4 = (current sales level - 4,314,000) / current sales level

0.4current sales level = current sales level - 4,314,000

4,314,000 = 0.6current sales level

$7,190,000 = current sales level