Nodak Corp reported sales of 4000000 for the month and incur

Nodak Corp. reported sales of $4,000,000 for the month and incurred variable expense totaling $2,800,000, and fixed expenses totaling $720,000. The company has no beginning or ending inventories. A total of 50,000 units were produced and sold last month. What is the company\'s margin of safety in dollars? What is the company\'s margin of safety ratio? Explain and show your work.

Solution

Margin of safety = Actual sales - Break-even sales = $4000000 - $2400000 = $1600000

Break-even sales = Fixed expenses/Contribution margin ratio = $720000/30% = %2400000

Contribution margin ratio = (Sales - Variable expense)/Sales = ($4000000 - $2800000)/$4000000 = $1200000/$4000000 = 30%

Margin of safety ratio = Margin of safety/Actual sales = $1600000/$4000000 = 40%