Corner Cupcakes Co. is selling cupcakes for $8 for a box of four. Corner has fixed costs equaling $8,800 per month, and its accounting firm has determined the contribution margin ratio on each box of donuts to be 55%. Corner is currently averaging monthly sales of 2,600 boxes of donuts, and the company has a tax rate of 40%. Based on this information, which of the following statements is correct?

Question

Quizplus · Accepted Answer

The margin of safety is the amount, either in dollars or in units, that current sales levels exceed the break-even point. Break-even is equal to the point at which sales in units multiplied by contribution margin is equal to total fixed costs. If fixed costs are $8,800 per month, and each box sells for $8 with a contribution margin of 55%, then the contribution margin per box of donuts sold is $4.40 ($8 × 55%), and the break-even point is 2,000 boxes per month ($8,800 ÷ $4.40). If current sales are 2,600 boxes per month, then the margin of safety is 600 boxes, or $4,800 per month (600 × $8) in sales revenues.