Question

Awtis Corporation has a margin of safety percentage of 25% based on its actual sales. The break-even point is $240,000 and the variable expenses are 45% of sales. Given this information, the actual profit is:

Multiple Choice

$33,000

$64,000

$12,000

$44,000

Answer 1

Answer:

$44,000

Explanation:

Margin of safety is the value of profit after deducting variable and fixed expenses from sales.

To calculatemargin of safety we need contribution margin ratio.

Contribution Margin ratio= 1- Variable expenses ratio

Contribution Margin ratio = 1 - 0.45 = 0.55

As we know

Break even sales = fixed expenses / Contribution Margin ratio

240,000 = fixed expenses / 0.55

Fixed Cost =$240,000 x 55% = $132,000  

Total actual sales = Break even sales / ( 1 - margin of safety )

Total actual sales = $240,000 / ( 1 - 25% )

Total actual sales = $320,000

Profit = ( Contribution Margin ratio x Sales ) - fixed expenses

Profit=(55% x 320,000) - 132,000

Profit= 176,000 - 132,000 = $44,000

Answer 2

The actual profit is $44,000.

• The calculation is as follows;

Total sales = Breakeven sales + MOS

The breakeven is

= (1 -0 .25)

= 0.75Sales

Now

Total sales is

= (240,000 ÷ 0.75)

= $320,000

Now

MOS is

= (320,000 × 25%)

= $80,000

Now  

Contribution margin=Sales  - Variable expenses

= (1 - 0.45)

= 0.55Sales

Now actual profit

= (0.55 of $80,000)

= $44,000

Therefore we can conclude that The actual profit is $44,000.

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