Question

a. If Canace Company, with a break-even point at $960,000 of sales, has actual sales of $1,200,000, 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 $1,875,000, and variable costs were 80% of sales, what was the amount of actual sales (dollars)? (Hint: Determine the break-even in sales dollars first.) $

Answer 1

Answer:

(A)

240,000 margin of safety in dollars

20% as percent of sales

(B)

actual sales= 11,250,000

Explanation:

$current \:sales - BEP_{USD} = margin \: of \: safety$

1,200,000 - 960,000 = 240,000 margin of safety in dollars

$\frac{current \:sales - BEP_{USD}}{current \:sales} \times 100 = margin \: of \: safety$

$\frac{1,200,000 - 960,000}{1,200,000} \times 100 = margin \: of \: safety$

240,000/1,200,000 = 0.2 x 100 = 20%

For B we will determinate the BEP in dollars and then add the 20% margin of safety.

$\frac{Fixed\:Cost}{Contribution \:Margin \:Ratio} = Break\: Even\: Point_{dollars}$

$\frac{1,875,000}{0.2} = Break\: Even\: Point_{dollars}$

BEP = 9,375,000

BEP x ( 1+margin of safety) = actual sales

BEP x (1 + 20%) = 11,250,000