Jerome Corp.has fixed costs of $500,000 and a contribution margin ratio of 40%.Currently,sales are $3,000,000.What is Jerome's margin of safety?
A)$1,750,000
B)$3,500,000
C)$5,250,000
D)$7,000,000

Question

Quizplus · Accepted Answer

Margin of safety = Actual or budgeted sales - Break-even sales
Break-even sales = Fixed costs ÷ Contribution margin ratio
We can first calculate the break-even sales:
Break-even sales = $500,000 ÷ 0.4 = $1,250,000
Then we can calculate the margin of safety:
Margin of safety = $3,000,000 - $1,250,000 = $1,750,000
Therefore, the correct answer is A) $1,750,000.