margin of safety

CHAPTER 3
PROFITABILITY ANALYSIS AND PLANNING
Exercise 3-3
a. Sales $800,000 Variable costs (380,000) Contribution margin $420,000

Contribution margin ratio = $420,000/$800,000 = 0.525 Annual break-even dollar sales volume = $210,000/0.525 = $400,000
b. Annual margin of safety in dollars: Sales $800,000 Break-even sales dollars (400,000) Margin of safety $400,000

c. To determine the variable and total costs lines, it is necessary to compute the variable cost ratio:

Variable = variable costs = $380,000 = 0.475 cost ratio sales $800,000
At a volume of $1,000,000 sales dollars, variable costs are $475,000.

d. Revised annual break-even dollar sales:

($210,000 + $52,500)/0.525 = $500,000
Exercise 3-8

a. Contribution margin $380,000 Sales 950,000 Contribution margin ratio 0.40

Break-even point in sales dollars = $190,000/0.40 = $475,000

b. Current sales $950,000 Break-even sales (475,000) Margin of safety $475,000

c. Current fixed costs $190,000 Impact of increase 50,000 New fixed costs $240,000

Revised break-even point = $240,000/0.40 = $600,000

d. Required before-tax income = $200,000/(1  0.36) = $312,500

Sales volume required to provide an after-tax income of $200,000:
($190,000 + $312,500)/0.40 = $1,256,250

e. Sales $1,256,250 Variable costs (60% of sales)