Market Sales had $1,200,000 in sales last month. The variable cost ratio was 60% and operating profits were $80,000.
-What is Market's margin of safety in sales dollars?
A) $200,000.
B) $300,000.
C) $500,000.
D) Cannot determine with the information given.

Question

Market Sales had $1,200,000 in sales last month. The variable cost ratio was 60% and operating profits were $80,000. 
-What is Market's margin of safety in sales dollars?
A) $200,000.
B) $300,000.
C) $500,000.
D) Cannot determine with the information given.

Quizplus · Accepted Answer

The margin of safety is calculated as actual sales minus break-even sales. Break-even sales can be calculated by dividing fixed costs by the contribution margin ratio. Given that operating profits are $80,000, we can infer fixed costs are $640,000 (since $1,200,000 * 40% - $640,000 = $80,000). The contribution margin ratio is 40% (100% - 60% variable cost ratio). Break-even sales = $640,000 / 0.40 = $1,600,000. Since actual sales are $1,200,000, the margin of safety is $1,200,000 - $1,000,000 = $200,000.

Market Sales Had $1,200,000 in Sales Last Month