The following is last month's contribution format income statement: What is the company's margin of safety percentage?

Question

The following is last month's contribution format income statement:  What is the company's margin of safety percentage?

Quizplus · Accepted Answer

Margin of safety percentage is calculated by subtracting the break-even sales from the actual sales, and then dividing the difference by the actual sales. From the contribution format income statement, the break-even sales can be calculated as $120,000 ($40,000 fixed expenses / 0.25 contribution margin ratio). The actual sales are $200,000. Therefore, the margin of safety percentage is ($200,000 - $120,000) / $200,000 = 40%. Option C is the correct answer.

The Following Is Last Month's Contribution Format Income Statement