John Anderson Company Below is an income statement for John Anderson Company:
$\begin{array}{ll}
\text { Sales } & \$ 300,000 \
\text { Variable costs } & \underline{(150,000)} \
\text { Contribution margin } & \$ 150,000 \
\text { Fixed costs } & \underline{(100,000)} \
\text { Profit before taxes } & \underline{\$ 50,000}
\end{array}$ Refer to John Anderson Company.What was the company's margin of safety?
A)$50,000
B)$100,000
C)$150,000
D)$25,000

Question

Quizplus · Accepted Answer

The margin of safety is calculated as (Actual Sales - Break-even Sales). The break-even sales are where profit before taxes is zero, which occurs when contribution margin equals fixed costs ($100,000). Thus, break-even sales are $200,000. The margin of safety is $300,000 (actual sales) - $200,000 (break-even sales) = $100,000.

John Anderson Company Below Is an Income Statement for John