Question

Mcmurtry Corporation sells a product for $160 per unit. The product's current sales are 12,700 units and its break-even sales are 11,176 units. The margin of safety as a percentage of sales is closest to:
A. 85 %
B. 87%
C. 15%
D. 13%

Answer 1

Answer:

The correct answer is:

13% (D)

explanation:

The margin of safety in accounting refers to the amount of sales that are above the break-even sales. It is the amount by which a company's sale can reduce, before the company stops making profit, hence it is the amount of sales that bring profit, after every cost in production has been deducted.

to calculate the margin of safety, we will first of all find the difference between the total sales and the break-even point as follows:

Total units sold = 12,700

margin of safety = 11,176 units

Break-even point = 12,700 - 11,176 = 1,524 units

Next we are asked to express the margin of safety as a percentage of the sales. This is done as follows:

(margin of safety ÷ total sales) × 100

= (1,524 ÷ 12,700) × 100 = 12%

and the closest answer in the option to 12% is 13%, hence the answer is 13%