Highjinks, Inc., has provided the following budgeted data: What is the company's margin of safety as a percentage of sales?

Question

Highjinks, Inc., has provided the following budgeted data:  What is the company's margin of safety as a percentage of sales?

Quizplus · Accepted Answer

CM ratio = Unit CM ÷ Unit selling price
= ($100 per unit - $70 per unit) ÷ $100 per unit = 0.30
Dollar sales to break even = Fixed expenses ÷ CM ratio
= $450,000 ÷ 0.30 = $1,500,000
Margin of safety in dollars = Total budgeted (or actual) sales - Break-even sales
= (20,000 units × $100 per unit) - $1,500,000
= $2,000,000 - $1,500,000 = $500,000
Margin of safety percentage = Margin of safety in dollars ÷ Total budgeted (or actual) sales
= $500,000 ÷ $2,000,000 = 0.25