James Company has a margin of safety percentage of 20% based on its actual sales.The break-even point is $200,000 and the variable expenses are 45% of sales.Given this information,the actual profit is:
A)$27,500
B)$18,000
C)$22,500
D)$22,000

Question

Quizplus · Accepted Answer

CM ratio = 1 - Variable expense ratio
= 1 - 0.45 = 0.55
Dollar sales to break even = Fixed expenses F1F1F1S1F1F1F10 CM ratio
$200,000 = Fixed expenses F1F1F1S1F1F1F10 0.55
Fixed expenses = $200,000 F1F1F1S1F1F1F10 0.55 = $110,000
Margin of safety in dollars = Total actual sales - Break-even sales
Margin of safety percentage = Margin of safety in dollars F1F1F1S1F1F1F10 Total actual sales
Margin of safety percentage = (Total actual sales - Break-even sales)F1F1F1S1F1F1F10 Total actual sales
Margin of safety percentage = 1 - Break-even sales F1F1F1S1F1F1F10 Total actual sales
Break-even sales F1F1F1S1F1F1F10 Total actual sales = 1 - Margin of safety percentage
Total actual sales = Break-even sales F1F1F1S1F1F1F10 (1 - Margin of safety percentage)
= $200,000 F1F1F1S1F1F1F10 (1 - 0.20)= $250,000
Profit = CM ratio F1F1F1S1F1F1F10 Sales - Fixed expenses
= 0.55 F1F1F1S1F1F1F10 $250,000 - $110,000 = $27,500

James Company Has a Margin of Safety Percentage of 20