The following is Addison Corporation's contribution format income statement for last month:

$\begin{array} { | l | r | }
\hline \text { Sales } & \$ 1,000,000 \
\hline \text { Less: variable expenses } & \underline { 700,000 } \
\hline \text { Contribution margin } & 300,000 \
\hline \text { Less: fixed expenses } & \underline { 180,000 } \
\hline \text { Operating income } & \$ 120,000 \
\hline
\end{array}$The company has no beginning or ending inventories. A total of 20,000 units were produced and sold last month.

-What is the company's margin of safety in dollars?
A) $400,000.
B) $600,000.
C) $120,000.
D) $880,000.

Question

The following is Addison Corporation's contribution format income statement for last month:

$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 1,000,000 \
\hline \text { Less: variable expenses } & \underline { 700,000 } \
\hline \text { Contribution margin } & 300,000 \
\hline \text { Less: fixed expenses } & \underline { 180,000 } \
\hline \text { Operating income } & \$ 120,000 \
\hline
\end{array}$The company has no beginning or ending inventories. A total of 20,000 units were produced and sold last month.

-What is the company's margin of safety in dollars?
A) $400,000.
B) $600,000.
C) $120,000.
D) $880,000.

Quizplus · Accepted Answer

The margin of safety in dollars is calculated as total sales minus break-even sales. Break-even sales can be found by dividing fixed expenses by the contribution margin ratio (contribution margin divided by sales). Here, the contribution margin ratio is $300,000 / $1,000,000 = 0.3. Fixed expenses are $180,000. So, break-even sales = $180,000 / 0.3 = $600,000. Therefore, the margin of safety = $1,000,000 - $600,000 = $400,000.

The Following Is Addison Corporation's Contribution Format Income Statement for Last