Alford, Brooks, and Fitch Companies Below are income statements that apply to three companies: Alford, Brooks, and Fitch:
Refer to Alford, Brooks, and Fitch Companies. At sales of $100, which firm has the highest margin of safety?

Question

Alford, Brooks, and Fitch Companies Below are income statements that apply to three companies: Alford, Brooks, and Fitch:
 Refer to Alford, Brooks, and Fitch Companies. At sales of $100, which firm has the highest margin of safety?

Quizplus · Accepted Answer

Margin of safety is the difference between the actual or expected sales volume and the breakeven sales volume. It indicates the amount by which sales can decrease before the company incurs a loss. To calculate margin of safety, we need to find out the breakeven point first. 
Breakeven point = Fixed expenses / Contribution margin ratio
Using the data from the income statements, we can calculate the breakeven point for each company as follows:
- Alford = 5,000 / (100 - 60) = 12,500
- Brooks = 10,000 / (100 - 80) = 50,000
- Fitch = 15,000 / (100 - 90) = 150,000
Margin of safety = Actual or expected sales - Breakeven sales
At sales of $100, the margin of safety for each company would be:
- Alford = 100 - 12,500 / 100 = -12,400
- Brooks = 100 - 50,000 / 100 = 50
- Fitch = 100 - 150,000 / 100 = -1,500
Therefore, Fitch Company has the highest margin of safety as it requires much higher sales volume than the other two companies to break even.

Alford, Brooks, and Fitch Companies Below Are Income Statements That