Question

3) The sales required to eam the target profit for the year using the contribution margin approach (2 marks) 4) The margin of safety in dollars assuming the actual sales for the year are $325 000 (2 marks)

Answer 1

Ans :

3). Contribution margin method for target profit :

Under this method, the target profit is added in the total fixed expenses and the resultant figure is then divided by the unit contribution margin. So, unit sale for target profit =

Total fixed expenses + Target profit

________________________________________ Contribution margin per unit

Note : All variable costs are aggregated and deducted from revenue in order to arrive at contribution margin after which all fixed costs are deducted from the contribution margin in order to arrive at the net profit or loss.

4). The margin of safety is the amount of sales over a company's break even point.

Margin of safety formula can also be expressed in dollar amounts.

Margin of safety in dollars = Current sales - Breakeven sales

Note : To calculate break even sales in dollars divide all fixed expenses by the average contribution margin percentage.

Contribution margin is sales minus all variable expenses., expressed as a percentage.