Question

Henderson Co. has fixed costs of $36,000 and a contribution margin ratio of 24%. If expected sales are $200,000, what is the margin of safety as a percent of sales?

Answer 1

Answer:

The margin of safety as a percent of sales is 25%

Explanation:

Break-even is the level of sales at which business has no profit no loss situation.

Break-even point = Fixed cost / Contribution margin ratio = $36,000 / 24% = $150,000

Margin of safety is the level of sales at which the business is safe from making loss. Margin of safety measures the profit after the break-even point.

Margin of Safety = Total sales - Break-even point = $200,000 - $150,000 = $50,000

Margin of safety to sales = ( $50,000 / $200,000 ) x 100 = 0.25 x 100 = 25%