Young Company has a margin of safety percentage of 20%.The break-even in sales dollars point is $400,000 and the variable costs are 40% of sales.Given this information,the net income is:

Question

Quizplus · Accepted Answer

Margin of safety percentage = 20%

Therefore, the margin of safety in dollars = (20% x Total Sales)

Let's say the total sales are TS. Then,

Margin of safety in dollars = 0.2TS

Break-even point = $400,000

Variable costs = 40% of sales

Let's say the total sales required to break even are BE. Then,

BE - 0.4BE = $400,000

0.6BE = $400,000

BE = $666,667

Now we can calculate the total sales required to achieve a 20% margin of safety:

TS = $666,667 + ($666,667 x 0.2)

TS = $800,000

Therefore, the total contribution margin is:

Total Sales - Total Variable Costs

= $800,000 - (0.4 x $800,000)

= $480,000

Net income = Total contribution margin - Fixed costs

= $480,000 - ($800,000 - $400,000)

= $80,000

Hence, the correct option is C.

Young Company Has a Margin of Safety Percentage of 20