margin of safety

a. if kirwan company, with a break-even point at $2,080,000 of sales, has actual sales of $3,200,000, what is the margin of safety expressed (1) in dollars and (2) as a percentage of sales?
1. $
2. %

b. if the margin of safety for kirwan company was 25%, fixed costs were $1,500,000, and variable costs were 60% of sales, what was the amount of actual sales (dollars)? (hint: determine the break-even in sales dollars first.)
$

Question

margin of safety

a. if kirwan company, with a break-even point at $2,080,000 of sales, has actual sales of $3,200,000, what is the margin of safety expressed (1) in dollars and (2) as a percentage of sales?
1. $
2. %

b. if the margin of safety for kirwan company was 25%, fixed costs were $1,500,000, and variable costs were 60% of sales, what was the amount of actual sales (dollars)? (hint: determine the break-even in sales dollars first.)
$

Accepted Answer

{ "quality": "clear", "question_count": 2, "skills_matched": [ "step_cot", "explain_then_answer", "tutor", "mastery_adaptive_brevity" ], "needs_drawing": false, "concepts_used": [ "Margin of Safety", "Break-Even Analysis", "Fixed Cost", "Variable Cost" ], "new_concepts": [], "current_concepts": [ "Margin of Safety", "Break-Even Analysis", "Fixed Cost", "Variable Cost" ] } ## Calculate Margin of Safety in Dollars Using the *Margin of Safety* knowledge point $$ \begin{aligned} \text{Margin of Safety (Dollars)} &= \text{Actual Sales} - \text{Break-Even Sales} \ &= \$3,200,000 - \$2,080,000 \ &= \$1,120,000 \end{aligned} $$ ## Calculate Margin of Safety Percentage Using the *Margin of Safety* knowledge point $$ \begin{aligned} \text{Margin of Safety Percentage} &= \frac{\text{Margin of Safety (Dollars)}}{\text{Actual Sales}} \times 100\% \ &= \frac{\$1,120,000}{\$3,200,000} \times 100\% \ &= 0.35 \times 100\% \ &= 35\% \end{aligned} $$ ## Calculate Break-Even Sales for Part b Using the *Break-Even Analysis*, *Fixed Cost*, and *Variable Cost* knowledge points $$ \begin{aligned} \text{Contribution Margin Ratio (CMR)} &= 100\% - \text{Variable Cost Ratio} \ &= 100\% - 60\% = 40\% \ \text{Break-Even Sales} &= \frac{\text{Fixed Costs}}{\text{CMR}} \ &= \frac{\$1,500,000}{0.40} \ &= \$3,750,000 \end{aligned} $$ ## Calculate Actual Sales for Part b Using the *Margin of Safety* knowledge point $$ \begin{aligned} \text{Margin of Safety Percentage} &= \frac{\text{Actual Sales} - \text{Break-Even Sales}}{\text{Actual Sales}} \ 0.25 &= \frac{\text{Actual Sales} - \$3,750,000}{\text{Actual Sales}} \ 0.25 \times \text{Actual Sales} &= \text{Actual Sales} - \$3,750,000 \ 0.75 \times \text{Actual Sales} &= \$3,750,000 \ \text{Actual Sales} &= \frac{\$3,750,000}{0.75} \ &= \$5,000,000 \end{aligned} $$ ## Question a 1. $ 1,120,000 2. 35 % ## Question b $ 5,000,000 { "subject": "Business", "question_type": "Multi-part", "knowledge_point": [ "Business", "Accounting", "Margin of Safety" ] }

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Question

Explanation:

Calculate Margin of Safety in Dollars

Calculate Margin of Safety Percentage

Calculate Break-Even Sales for Part b

Calculate Actual Sales for Part b

Answer:

Question a

Question b