Question

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

Sales	$	55,000
Variable expenses		33,000
Contribution margin		22,000
Fixed expenses		14,960
Net operating income	$	7,040

11. What is the margin of safety in dollars? What is the margin of safety percentage?

Answer 1

Sales = $55,000

Less: Variable cost = $33,000

Contribution Margin = $22,000

Less: Fixed Expenses = $14,960

Net Operating Income = $7,040

Contribution Margin ratio = Contribution margin / sales = $22,000 / $55,000 = 0.40

Break even point (sales in dollars) = Fixed cost / Contribution margin ratio = $14,960 / 0.40

Break even point (sales in dollars) = $37,400

Margin of safety = Actual sales - Break even sales = $55,000 - $37,400

Margin of safety = $17,600.

Margin of safety percentage = (Actual sales - Break even sales) / Actual sales

= $17,600 / $55,000 = 0.32

Margin of safety percentage = 32%