Jean Simmons Company
Below is an income statement for Jean Simmons Company:
Sales $ \$ 300,000 $
Variable costs $\underline{(150,000)}$
Contribution margin $150,000
Fixed costs $\underline{(100,000)}$
Profit before taxes $\underline{\$50,000}$

Refer to Jean Simmons Company.What was the company's margin of safety?

Question

Jean Simmons Company
Below is an income statement for Jean Simmons Company:
Sales                                                                          $ \$ 300,000 $
Variable costs                                                          $\underline{(150,000)}$
Contribution margin                                                  $150,000
Fixed costs                                                            $\underline{(100,000)}$
Profit before taxes                                                  $\underline{\$50,000}$

Refer to Jean Simmons Company.What was the company's margin of safety?

Quizplus · Accepted Answer

The margin of safety is calculated as the difference between actual sales and the break-even sales. In this case, the company's profit before taxes is $50,000, which indicates it is above the break-even point. The fixed costs are $100,000, and the contribution margin ratio (contribution margin divided by sales) is 50% ($150,000 / $300,000). To find the break-even sales, we divide the fixed costs by the contribution margin ratio: $100,000 / 0.5 = $200,000. The margin of safety is then the actual sales ($300,000) minus the break-even sales ($200,000), which equals $100,000.

Jean Simmons Company Below Is an Income Statement for Jean $300,000 \$ 300,000 $300,000

Jean Simmons Company
Below Is an Income Statement for Jean $\$ 300,000$