Corey Company has a margin of safety percentage of 20%. The break-even point is $200,000 and the variable costs are 45% of sales. Given this information, the operating profit is:
A) $27,500.
B) $18,000.
C) $22,500.
D) $22,000.

Question

Quizplus · Accepted Answer

The margin of safety is the difference between actual sales and break-even sales, expressed as a percentage of actual sales. In this case, the margin of safety is 20%, so actual sales are 120% of break-even sales. The break-even point is $200,000, so actual sales are $240,000. Variable costs are 45% of sales, so variable costs are $108,000. Fixed costs are $92,000 ($200,000 - $108,000). Operating profit is sales minus variable costs minus fixed costs, or $240,000 - $108,000 - $92,000 = $40,000.

Corey Company Has a Margin of Safety Percentage of 20