Question

Henderson Co. has fixed costs of $36,000 and a contribution margin ratio of 24%. If expected sales are $200,000, what is the margin of safety as a percent of sales? Group of answer choices 50%. 6%. 25%. 75%. 33%.

Answer 1

Answer:

25%

Explanation:

the margin of safety is the percent of sales which the company is above the break even point.

We solve for the break even point:

$\frac{Fixed\:Cost}{Contribution \:Margin \:Ratio} = Break\: Even\: Point_{dollars}$

$\frac{36,000}{0.24} = Break\: Even\: Point_{dollars}$

BEP  = 150,000

We solve for the margin of safety:

$ 200,000 - $ 150,000 = $ 50,000

Now we compare against our sales:

$ 50,000 / $ 200,000 = 0.25