RedTail Mfg has the following data: If RedTail has actual monthly sales of $1,500,000 and desires an operating profit of $50,000 per month,what is the margin of safety?
A)$100,000
B)$266,667
C)$50,000
D)$1,130,000

Question

Quizplus · Accepted Answer

Margin of safety is calculated as Actual Sales - Break-even Sales. 
To find Break-even Sales, we need to add Desired Operating Profit to Fixed Costs and divide the sum by Contribution Margin ratio. 
Assuming contribution margin ratio is 40%. 
Break-even Sales = (Fixed Costs + Desired Operating Profit) / Contribution Margin Ratio 
= ($1,500,000 - $50,000) / 0.4 
= $3,712,500 
Margin of Safety = $1,500,000 - $3,712,500 
= -$2,212,500 
This means RedTail Mfg is not able to cover its fixed costs and desired operating profit with its actual sales. Therefore, the margin of safety is negative. 
The closest option to the negative margin of safety is option B, which is $266,667. However, this is not the correct answer.

RedTail Mfg Has the Following Data: If RedTail Has Actual