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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Margin of safety

  1. a. If Canace Company, with a break-even point at $960,000 of sales, has actual sales of $1,200,000, what is the margin of safety expressed (1) in dollars and (2) as a percentage of sales?
  2. b.  If the margin of safety for Canace Company was 20%, fixed costs were $1,875,000, and variable costs were 80% of sales, what was the amount of actual sales (dollars)? (Hint: Determine the break-even in sales dollars first.)

a. (1)

To determine

Margin of Safety: It is a measure that shows the probability of decrease in the sales level before a company faces an operating loss or reaches its break-even point. It is expressed in terms of dollars of sales, unit of sales, and percent of current sales. The formula to calculate the margin of safety as a percent of current sales is as follows:

 MarginofSafety=SalesSalesatBreak-EvenPointSales

To determine: the Company C’s margin of safety expressed in dollars.

Explanation

Determine the Company J’s margin of safety expressed in dollars.

Sales =$1,200,000

Sales at break-even point =$960,000

 MarginofSafety=SalesSalesat</

(2)

To determine
the Company C’s margin of safety expressed as a percentage of sales.

b.

To determine
the amount of actual sales (dollars).

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