Question

A company with a break-even point at $900,000 in sales revenue had fixed costs of $225,000. When actual sales were $1,000,000, variable costs were $750,000. Determine the following: Round your percentage answers to the nearest whole number. a. Margin of safety expressed in dollars $ b. Margin of safety expressed as a percentage of sales % c. Contribution margin ratio % d. Operating income $

Answer 1

Answer:

a.  $100,000

b.  10%

c.  25%

d.  $25,000

Explanation:

a.

The MOS (Margin of Safety) means the excess sales over Break Even Point (the point of 0 profit).

Now formula is:

Margin of Safety = Actual Sales - Break Even Sales

So,

MOS = 1,000,000 - 900,000 = $100,000

b.

This is the previous answer as a percentage of total sales, which is 1,000,000. So we have the formula and answer:

Margin of Safety Percentage = Margin of Safety / Actual Sales

So,

MOS (%) = 100,000/1,000,000 = 10%

c.

THe contribution margin ratio is the company's sales minus variable costs expressed as a ratio/percentage. The formula is:

Contribution Margin Ratio = (Sales - Variable Costs) / Sales

So,

CM Ratio = (1,000,000 - 750,000) / 1,000,000

CM Ratio = 25%

d.

The operating income is what a company has after it has subtracted both variable and fixed cost from its sales. The formula is:

Operating Income = Sales - Variable Costs - Fixed Costs

OI = 1,000,000 - 750,000 - 225,000 = 25000

OI = $25,000