During the most recent year, RDJ Company reported sales of $1,200,000, variable expenses of $720,000, and a margin of safety of $450,000. How much were RDJ's fixed expenses?

Question

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Fixed expenses can be calculated using the margin of safety and the contribution margin ratio. The margin of safety is the difference between actual sales and break-even sales. First, calculate the contribution margin (sales - variable expenses) = $1,200,000 - $720,000 = $480,000. Then, find the contribution margin ratio (contribution margin / sales) = $480,000 / $1,200,000 = 0.4. The margin of safety in dollars is $450,000, which means the break-even point is sales of $750,000 ($1,200,000 - $450,000). To find fixed expenses, we use the formula: Fixed Expenses = Total Contribution Margin - Profit. Since we're looking for the break-even point, profit is $0. Therefore, Fixed Expenses = Sales at Break-even * Contribution Margin Ratio = $750,000 * 0.4 = $300,000. However, this calculation seems to have been misunderstood in the explanation process. The correct approach to find fixed expenses directly from the given data is to subtract the margin of safety from the total sales to find the break-even sales, then use the contribution margin to find fixed expenses. However, the provided data and steps lead to confusion in the explanation. The correct way to find fixed expenses is to understand that at the break-even point, contribution margin equals fixed expenses. Given the error in the calculation process, let's correct the approach:The correct calculation should directly relate to how fixed expenses impact the margin of safety and contribution margin. Given the sales ($1,200,000), variable expenses ($720,000), and the margin of safety ($450,000), we first calculate the contribution margin: Sales - Variable Expenses = $1,200,000 - $720,000 = $480,000. This contribution margin represents the amount available to cover fixed expenses and profit. However, the margin of safety is the excess of current sales over the break-even sales, not directly telling us the fixed expenses without knowing the profit or the exact break-even point in terms of sales.Given the misunderstanding in the initial explanation, the correct identification of fixed expenses should come from understanding that fixed expenses are covered by the total contribution margin at the break-even point (where profit is zero). Without the direct calculation steps provided in the options or a clear path from the margin of safety to fixed expenses, the correct answer hinges on understanding the relationship between these variables and the formula for calculating fixed expenses, which is not directly provided by the information given. The initial approach mistakenly attempted to use the margin of safety to calculate fixed expenses, which was incorrect. The correct method involves using the contribution margin and the sales data to find the break-even point and then deduce the fixed expenses, but the provided data does not directly lead to a straightforward calculation without assuming or knowing additional information about the profit or the exact break-even sales figure.

During the Most Recent Year, RDJ Company Reported Sales of $1,200,000