Question

For Oriole Company, actual sales are $1,450,000, and break-even sales are $971,500.

Required:
a. Compute the margin of safety in dollars.
b. Compute the margin of safety ratio.

Answer 1

Answer:

a. Margin of safety in dollars = $478,500

b. Margin of safety ratio = 33%

Explanation:

a. Margin of safety in dollars is calculated as;

= Actual sales - Break even sales

Given that;

Actual sales = $1,450,000

Break even sales = $971,500

Margin of safety in dollars

= $1,450,000 - $971,500

= $478,500

b. Margin of safety ratio is computed as;

= [(Actual sales - Break even sales) / Actual sales] × 100

= [($1,450,000 - $971,500) / $1,450,000] × 100

= [$478,500 / $1,450,000] × 100

= 0.33 × 100

= 33%