Putnam Company
Below is an income statement for Putnam Company:
Sales $ 600,000
Variable costs $\underline{\$150,000}$
Contribution margin $ \$ 450,000 $
Fixed costs $\underline{(300,000)}$
Profit before taxes $\underline{\$150,000}$

Refer to Putnam Company.What was Putnam's margin of safety?
A)$150,000
B)$175,000
C)$200,000
D)$300,000

Question

Putnam Company
Below is an income statement for Putnam Company:
Sales                                                       $ 600,000 
Variable costs                                         $\underline{\$150,000}$
Contribution margin                               $ \$ 450,000 $ 
Fixed costs                                              $\underline{(300,000)}$
Profit before taxes                                    $\underline{\$150,000}$

Refer to Putnam Company.What was Putnam's margin of safety?
A)$150,000
B)$175,000
C)$200,000
D)$300,000

Quizplus · Accepted Answer

The margin of safety is calculated as the difference between actual sales and break-even sales. Putnam's profit before taxes is $150,000, which means they are above the break-even point. The contribution margin ratio is $450,000 / $600,000 = 0.75. To find the break-even sales, we use the formula: Fixed Costs / Contribution Margin Ratio = $300,000 / 0.75 = $400,000. Therefore, the margin of safety is Actual Sales - Break-even Sales = $600,000 - $400,000 = $200,000.

Putnam Company Below Is an Income Statement for Putnam Company $150,000‾\underline{\$150,000}$150,000​

Putnam Company
Below Is an Income Statement for Putnam Company $\underline{\$150,000}$