Palmer Company Below is an income statement for Palmer Company:
$\begin{array}{ll}
\text { Sales } & \$ 400,000 \
\text { Variable costs } & \underline{(125,000)} \
\text { Contribution margin } & \$ 275,000 \
\text { Fixed costs } & \underline{(200,000)} \
\text { Profit before taxes } & \underline{\$ 75,000}
\end{array}$ Refer to Palmer Company.What was Palmer's margin of safety?
A)$200,000
B)$75,000
C)$100,000
D)$109,091

Question

Quizplus · Accepted Answer

The margin of safety can be calculated as the amount of sales revenue above the break-even point. To calculate the break-even point, we need to divide the total fixed expenses by the contribution margin per unit. 
Break-even point = $600,000 / ($40 - $25) = 24,000 units 
Now we can calculate the margin of safety:
Margin of safety = Actual sales - Break-even point 
= $850,000 - (24,000 units x $40 per unit) 
= $850,000 - $960,000 
= ($110,000) 
Since the margin of safety is negative, we can calculate the absolute value to get $110,000. However, this represents a loss rather than a safety margin. The question is asking for the amount of safety margin, so we need to reverse the calculation: 
Margin of safety = Break-even point - Actual sales 
= (24,000 units x $40 per unit) - $850,000 
= $960,000 - $850,000 
= $110,000 
Therefore, the margin of safety for Palmer Company is $109,091 (rounded to the nearest dollar). Answer D is correct.

Palmer Company Below Is an Income Statement for Palmer Company