Parker Company
Below is an income statement for Parker Company:
Sales $ \$ 400,000 $
Variable costs $\underline{(125,000)}$
Contribution margin $275,000
Fixed costs $\underline{(200,000)}$
Profit before taxes $\underline{\$75,000}$

Refer to Parker Company.What was Parker's margin of safety?
A)$200,000
B)$75,000
C)$100,000
D)$109,091

Question

Parker Company
Below is an income statement for Parker Company:
Sales                                                                          $ \$ 400,000 $
Variable costs                                                          $\underline{(125,000)}$
Contribution margin                                                  $275,000
Fixed costs                                                            $\underline{(200,000)}$
Profit before taxes                                                  $\underline{\$75,000}$

Refer to Parker Company.What was Parker's margin of safety?
A)$200,000
B)$75,000
C)$100,000
D)$109,091

Quizplus · Accepted Answer

Margin of safety is calculated by subtracting the break-even point from the actual or expected sales. In this case, the fixed costs are $200,000 and the contribution margin is $275,000, so the break-even point is:

Break-even point = Fixed costs / Contribution margin ratio 
Contribution margin ratio = Contribution margin / Sales 
Contribution margin ratio = $275,000 / $400,000 = 0.6875

Break-even point = $200,000 / 0.6875 
Break-even point = $290,909

Margin of safety = Sales - Break-even point 
Margin of safety = $400,000 - $290,909 
Margin of safety = $109,091

Therefore, the margin of safety for Parker Company is $109,091. Option D is correct.

Parker Company Below Is an Income Statement for Parker Company $400,000 \$ 400,000 $400,000

Parker Company
Below Is an Income Statement for Parker Company $\$ 400,000$