MANAGERIAL ACCT W/CONNECT >IC<
MANAGERIAL ACCT W/CONNECT >IC<
15th Edition
ISBN: 9781259405303
Author: Garrison
Publisher: MCG
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Chapter 5, Problem 11F15
To determine

Margin of Safety: A margin of safety is the comfort zone between the budgeted sales and the break even sales where a company is safe from any losses.

The margin of safety in dollars and percentage

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Answer to Problem 11F15

Solution:

1-a) The margin of safety in dollars is $ 5,000

1-b) The margin of safety in percentage is 25%

Explanation of Solution

A margin of safety is calculated by deducting the break-even sales in dollars from the budgeted sales in dollars of the company. The budgeted sale is an estimation of sales in dollars during a particular period which $20,000 as per exercise and the break-even sales in dollars is ascertained by dividing the fixed cost by contribution margin ratio $15,000. A contribution margin ratio is contribution margin expressed in percentage.

. Computation of Margin of Safety in dollars

  Margin of safety in dollars = Budgeted Sales in dollars  BreakEven Sales in dollars                                           = $20,000  $15,000                                           = $5,000

Computation of BreakEven point in dollar sales Breakeven point in dollar sales= Fixed expenseContribution margin ratio                                                  =  $6,000 0.4                                                  = $15,000

  *Contribution margin ratio =  Contribution margin Sales revenue*100                                          =  $8,000 $20,000*100                                         = 40% or 0.4 

Computation of Margin of Safety in percentage

  Margin of Safety in percentage =  Margin of safety in dollars Budgeted sales in dollars*100                                                 = $5,000/$20,000*100                                                  = 25%

Given:

    Sales (1,000 units ) $20,000
    Variable expenses $12,000
    Contribution margin $8,000
    Fixed expenses $6,000
    Net operating income $2,000
Conclusion

Hence it is concluded that the Oslo Company has Margin of Safety of $5,000 or 25% of sales revenue. It means that within the range of $5,000 the company is safe from incurring any loss from the sale of product. It provides the company a comfort of safety or time to take precautions to avoid any loss.

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Chapter 5 Solutions

MANAGERIAL ACCT W/CONNECT >IC<

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