KR Sales had $1,200,000 in sales last month.The variable cost ratio was 60% and operating profits were $80,000.What is KR's margin of safety?
A)$200,000
B)$300,000
C)$500,000
D)Cannot determine with the information given.

Question

Quizplus · Accepted Answer

The margin of safety is calculated as actual sales minus break-even sales. Break-even sales can be found by dividing fixed costs by the contribution margin ratio. The contribution margin ratio is 40% (100% - 60% variable cost ratio). Operating profits of $80,000 imply fixed costs of $400,000 (since $80,000 = $1,200,000 * 40% - fixed costs). Break-even sales are $1,000,000 ($400,000 / 40%). Therefore, the margin of safety is $1,200,000 - $1,000,000 = $200,000.

KR Sales Had $1,200,000 in Sales Last Month