Mark Smith Company Below is an income statement for Mark Smith Company:
$\begin{array}{ll}
\text { Sales } & \$ 400,000 \
\text { Variable costs } & (\underline{200,000}) \
\text { Contribution margin } & \$ 200,000 \
\text { Fixed costs } & (\underline{125,000}) \
\text { Profit before taxes }& \underline{\$ 75,000}
\end{array}$ Refer to Mark Smith Company.What was the company's margin of safety?
A)$ 37,500
B)$ 75,000
C)$125,000
D)$150,000

Question

Quizplus · Accepted Answer

The margin of safety is calculated as (Actual Sales - Break-even Sales). Break-even Sales = Fixed Costs / Contribution Margin Ratio. Contribution Margin Ratio = Contribution Margin / Sales = 200,000 / 400,000 = 0.5. Break-even Sales = 125,000 / 0.5 = 250,000. Margin of Safety = 400,000 - 250,000 = 150,000.

Mark Smith Company Below Is an Income Statement for Mark