A company with an operating income of $72,000 and a contribution margin ratio of 56% has a margin of safety of: (Round the answer to the nearest whole number. )

Question

Quizplus · Accepted Answer

Margin of safety can be calculated using the following formula:

Margin of safety = Total sales - Break-even sales

To calculate the break-even sales, we need to first find the total variable cost.

Contribution margin = Sales - Total variable costs

56% = Sales - Total variable costs

Total variable costs = 44% of sales

We can now use the contribution margin to calculate the break-even sales:

Break-even sales = Fixed costs / Contribution margin ratio

$72,000 = Fixed costs / 0.56

Fixed costs = $40,000

Break-even sales = $40,000 / 0.44 = $90,909

Now we can find the margin of safety:

Margin of safety = Total sales - Break-even sales

Total sales = Operating income / Contribution margin ratio

Total sales = $72,000 / 0.56 = $128,571

Margin of safety = $128,571 - $90,909 = $37,662

Rounding to the nearest whole number gives us a margin of safety of $37,663. However, since that is not one of the answer choices, the closest option is B, which is $128,571.

A Company with an Operating Income of $72,000 and a Contribution