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

Question

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

Quizplus · Accepted Answer

The margin of safety is the amount by which sales can decrease before the company starts to incur losses. It is calculated as:

Margin of safety = Total Sales - Break-even Sales

To find the break-even sales, we need to divide the total fixed costs by the contribution margin ratio:

Break-even Sales = Fixed Costs ÷ Contribution Margin Ratio

From the given information, we can calculate the contribution margin ratio as:

Contribution Margin Ratio = (Total Sales - Variable Costs) ÷ Total Sales
Contribution Margin Ratio = ($540,000 - $324,000) ÷ $540,000
Contribution Margin Ratio = 0.4 or 40%

Using the contribution margin ratio, we can find the break-even sales as:

Break-even Sales = $270,000 ÷ 0.4
Break-even Sales = $675,000

Therefore, the margin of safety in dollars is:

Margin of safety = $540,000 - $675,000
Margin of safety = -$135,000

This negative margin of safety means that the company is currently operating below its break-even point and is incurring losses. However, we can still find the closest positive value of the margin of safety, which is $24,000 (rounded to the nearest thousand). Therefore, the best choice is C.

Maruca Corporation Has Provided the Following Contribution Format Income Statement