Hedman Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range. The margin of safety percentage is closest to:
A) 75%
B) 1%
C) 6%
D) 24%

Question

Hedman Corporation has provided the following contribution format income statement.All questions concern situations that are within the relevant range.  The margin of safety percentage is closest to:
A) 75% 
B) 1% 
C) 6% 
D) 24%

Quizplus · Accepted Answer

CM ratio = Contribution margin ÷ Sales = $67,500 ÷ $270,000 = 25%
Dollar sales to break even = Fixed expenses ÷ CM ratio = $63,750 ÷ 25% = $255,000
Margin of safety in dollars = Total budgeted (or actual) sales - Break-even sales
= $270,000 − $255,000 = $15,000
Margin of safety percentage = Margin of safety in dollars ÷ Total budgeted (or actual) sales
= $15,000 ÷ $270,000 = 6%

Hedman Corporation Has Provided the Following Contribution Format Income Statement