KR Sales had $1,200,000 in sales last month.The variable cost ratio was 60% and operating profits were $80,000.What is KR's margin of safety in sales dollars?
A)$200,000.
B)$300,000.
C)$500,000.
D)Cannot determine with the information given.

Question

Quizplus · Accepted Answer

The margin of safety is calculated as actual sales minus break-even sales. The break-even sales can be calculated using the formula: Fixed Costs / Contribution Margin Ratio. The contribution margin ratio is 1 - variable cost ratio = 0.4. Operating profits are given as $80,000, which implies that fixed costs are $400,000 (since $80,000 = $1,200,000 * 0.4 - Fixed Costs). Therefore, break-even sales = $400,000 / 0.4 = $1,000,000. Margin of safety = $1,200,000 - $1,000,000 = $200,000.

KR Sales Had $1,200,000 in Sales Last Month