Hedman Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. The margin of safety percentage is closest to:

Question

Hedman Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range.  The margin of safety percentage is closest to:

Quizplus · Accepted Answer

CM ratio = Contribution margin ÷ Sales = $67,500 ÷ $270,000 = 25%
Dollar sales to break even = Fixed expenses ÷ CM ratio = $63,750 ÷ 25% = $255,000
Margin of safety in dollars = Total budgeted (or actual) sales − Break-even sales
= $270,000 − $255,000 = $15,000
Margin of safety percentage = Margin of safety in dollars ÷ Total budgeted (or actual) sales
= $15,000 ÷ $270,000 = 6%

Hedman Corporation Has Provided the Following Contribution Format Income Statement