b. If the margin of safety for Lankau Company was 25%, fixed costs were $2,325,000, and variable costs were 60% of sales, what was the amount of actual sales (dollars)? (Hint: Determine the break-even in sales dollars first.)
Answer:
a. (1) Margin of Safety (dollars) = Sales – Sales at Break-Even Point
Margin of Safety (dollars) = $880,000 – $660,000 = $220,000
(2) Margin of Safety (percentage) = Sales – Sales at Break-Even Point
Sales
Margin of Safety (percentage) = $220,000 ÷ $880,000 = 25%
b. The break-even point (S) is determined as follows:
Break-Even Sales (dollars) = Total Fixed Costs + Total Variable Costs (at Break-Even)
Break-Even Sales (dollars) = Total Fixed Costs + 60% Break-Even Sales (dollars)
Break-Even Sales (dollars) = $2,325,000 + 60% Break-Even Sales (dollars)
Break-Even Sales (dollars) – 60% Break-Even Sales (dollars) = $2,325,000
40% Break-Even Sales (dollars) = $2,325,000
Break-Even Sales (dollars) = $5,812,500
If the margin of safety is 25%, the actual sales are determined as follows:
Sales = Break-Even Sales (dollars) + (Sales × Margin of Safety)
Sales (dollars) = $5,812,500 + 25% Sales
Sales – 25% Sales = $5,812,500
75% Sales = $5,812,500
Sales = $7,750,000