Question

Hedman Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. Sales (9,000 units) $ 270,000 Variable expenses 202,500 Contribution margin 67,500 Fixed expenses 63,750 Net operating income $ 3,750 The margin of safety percentage is closest to: Multiple Choice 75% 1% 6% 24%

Answer 1

Answer:

6%

Explanation:

The computation of the margin of safety percentage is shown below;

The Contribution margin ratio is

= Contribution margin ÷Sales

= ($675,00 ÷ $270,000)

= 0.25

Now breakeven point in dollars is

= Fixed cost  ÷ Contribution margin ratio

 = ($63,750 ÷ 0.25)

= $255,000

We know that

Margin of safety = Total sales - Breakeven sales

= ($270,000 - $255,000)

= $15,000

Now Margin of safety % is

= MOS ÷ Total sale

 = ($15,000 ÷ $270,000)

= 5.56%

= 6%