Question

Stockmaster Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. Sales (8,000 units) $ 320,000 Variable expenses 192,000 Contribution margin 128,000 Fixed expenses 121,600 Net operating income $ 6,400 The margin of safety in dollars is closest to:

Answer 1

Answer:

Margin of safety= $16,000

Explanation:

Giving the following information:

Sales (8,000 units) $ 320,000

Variable expenses 192,000

Fixed expenses 121,600

First, we need to calculate the break-even point in dollars:

Selling price= 320,000/8,000= 40

Variable cost per unit= 192,000/8,000= 24

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 121,600 / [(40 - 24)/40]= 304,000

Margin of safety= (current sales level - break-even point)= 320,000 - 304,000= $16,000