The following is last month's contribution format income statement: $$\begin{array} { | l | c | }
\hline \text { Sales } ( 15,000 \text { units } ) & \$ 1,500,000 \
\hline \text { Less variable expenses } & 900,000 \
\hline \text { Contribution margin } & 600,000 \
\hline \text { Less fixed expenses } & 500,000 \
\hline \text { Net income } & \$ 100,000 \
\hline
\end{array}$$ What is the company's margin of safety in dollars?

Question

The following is last month's contribution format income statement: $$\begin{array} { | l | c | } 
\hline \text { Sales } ( 15,000 \text { units } ) & \$ 1,500,000 \
\hline \text { Less variable expenses } & 900,000 \
\hline \text { Contribution margin } & 600,000 \
\hline \text { Less fixed expenses } & 500,000 \
\hline \text { Net income } & \$ 100,000 \
\hline
\end{array}$$ What is the company's margin of safety in dollars?

Quizplus · Accepted Answer

The margin of safety in dollars is calculated as actual sales minus break-even sales. Break-even sales can be found by dividing fixed expenses by the contribution margin ratio (contribution margin divided by sales). Here, the contribution margin ratio is $600,000 / $1,500,000 = 0.4. Thus, break-even sales = $500,000 / 0.4 = $1,250,000. The margin of safety = $1,500,000 (actual sales) - $1,250,000 (break-even sales) = $250,000.

The Following Is Last Month's Contribution Format Income Statement What Is the Company's Margin of Safety in Dollars? A)$1,500,000

The Following Is Last Month's Contribution Format Income Statement What Is the Company's Margin of Safety in Dollars?
A)$1,500,000