Alford,Brooks,and Fitch Companies Below are income statements that apply to three companies: Alford,Brooks,and Fitch:
$\begin{array}{lccc}
&\text { AlfordCo.}&\text {BrooksCo.}&\text {FitchCo }\\hline
\text { Sales } & \$ 100 & \$ 100 & \$ 100 \
\text { Variable costs } & (\underline{10}) & (\underline{20}) & (\underline{30}) \
\text { Contribution margin } & \$ 90 & \$ 80 & \$ 70 \
\text { Fixed costs } & (\underline{30}) & (\underline{20}) & (\underline{10}) \
\text{Profit before taxes:}&\$ 60 &\$ 60 &\$ 60
\end{array}$ 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:
$\begin{array}{lccc}
&\text { AlfordCo.}&\text {BrooksCo.}&\text {FitchCo }\\hline
\text { Sales } & \$ 100 & \$ 100 & \$ 100 \
\text { Variable costs } & (\underline{10}) & (\underline{20}) & (\underline{30}) \
\text { Contribution margin } & \$ 90 & \$ 80 & \$ 70 \
\text { Fixed costs } & (\underline{30}) & (\underline{20}) & (\underline{10}) \
\text{Profit before taxes:}&\$ 60 &\$ 60 &\$ 60 
\end{array}$ 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 indicates how much sales can decrease before the company incurs a loss. It is calculated as (Actual Sales - Break-even Sales)/Actual Sales. At sales of $100, Fitch Company has the highest margin of safety at 20% (($140-$112)/$140). Alford Company has a margin of safety of 16.67% (($120-$100)/$120) and Brooks Company has a margin of safety of 14.28% (($130-$112)/$130). Therefore, the correct answer is C, Fitch Company.

Alford,Brooks,and Fitch Companies Below Are Income Statements That Apply to Three