The following is last month's contribution format income statement:
$\begin{array}{|l|r|}
\hline \text { Sales }(15,000 \text { units) } & \$ 1,500,000 \
\hline \text { Less: variable expenses } & 900,000 \
\hline \text { Contribution margin } & 600,000 \
\hline \text { Less: fixed expenses } & \$ 00,000 \
\hline \text { Operating income } & \$ 100,000 \
\hline
\end{array}$
What is the company's margin of safety in dollars?

Question

Quizplus · Accepted Answer

The margin of safety in dollars is calculated as the difference between actual or budgeted sales and the break-even sales. The break-even sales can be calculated as Fixed Expenses / Contribution Margin Ratio. Here, the contribution margin ratio is $ \frac{600,000}{1,500,000} = 0.4 $ or 40%. Fixed expenses are $500,000. So, break-even sales = $ \frac{500,000}{0.4} = 1,250,000 $. The margin of safety = Actual Sales - Break-even Sales = $1,500,000 - $1,250,000 = $250,000.

The Following Is Last Month's Contribution Format Income Statement What Is the Company's Margin of Safety in Dollars? A)

The Following Is Last Month's Contribution Format Income Statement What Is the Company's Margin of Safety in Dollars?
A)