Question

The budgeted income statement presented below is for Burkett Corporation for the coming fiscal year. If Burkett Corporation is able to achieve the budgeted level of sales, its margin of safety in dollars would be?
Sales (50,000 units) $1,000,000



Costs:


Direct materials $270,000


Direct labor 240,000


Fixed factory overhead 100,000


Variable factory overhead 150,000


Fixed marketing costs 110,000


Variable marketing costs 50,000 920,000


Pretax income $80,000

Answer 1

Answer:

Margin of safety= $275,862

Explanation:

Giving the following information:

Sales (50,000 units) $1,000,000

Costs:

Direct materials $270,000

Direct labor 240,000

Fixed factory overhead 100,000

Variable factory overhead 150,000

Fixed marketing costs 110,000

Variable marketing costs 50,000

First, we need to calculate the total variable costs and total fixed costs:

Total variable costs= 270,000 + 240,000 + 150,000 + 50,000

Total variable costs= 710,000

Total fixed costs= 100,000 + 110,000= 210,000

Now, we need to determine the break-even point in dollars:

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

Break-even point (dollars)= 210,000 / [(1,000,000 - 710,000)/1,000,000]

Break-even point (dollars)= 210,000/0.29

Break-even point (dollars)= 724,138

Finally, the margin of safety in dollars:

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

Margin of safety= 1,000,000 - 724,138

Margin of safety= $275,862