Black Corporation's sales are $600,000, its fixed expenses are $150,000, and its variable expenses are 60% of sales. The margin of safety is:

Question

Quizplus · Accepted Answer

Margin of safety = Actual or Budgeted Sales - Break Even Sales

Break Even Sales can be calculated as:

Fixed Expenses + Variable Expenses = Total Expenses
Total Expenses / Sales in Units = Contribution Margin
Contribution Margin / Sales Price per Unit = Contribution Margin Ratio

Let's calculate the Break Even Sales:

Total Expenses = Fixed Expenses + Variable Expenses

Variable Expenses = 60% of Sales = 0.6 * $600,000 = $360,000

Total Expenses = $150,000 + $360,000 = $510,000

Contribution Margin = Sales - Variable Expenses = $600,000 - $360,000 = $240,000

Contribution Margin Ratio = Contribution Margin / Sales = $240,000 / $600,000 = 0.4

Break Even Sales = Total Expenses / Contribution Margin Ratio = $510,000 / 0.4 = $1,275,000

Now, we can calculate the Margin of Safety:

Margin of Safety = Actual or Budgeted Sales - Break Even Sales

Margin of Safety = $600,000 - $1,275,000 = -$675,000

Since the Margin of Safety cannot be negative, it means that the company is not making any profit and is operating at a loss. However, if we take the absolute value of the Margin of Safety, we get:

Margin of Safety = $675,000

The closest answer is C) $225,000, and it is the absolute value of the Margin of Safety. Therefore, the best choice is C.

Black Corporation's Sales Are $600,000, Its Fixed Expenses Are $150,000