Asked by Brandon Morrone on Jul 11, 2024
Verified
The margin of safety in the Flaherty Company is $24,000. If the company's sales are $120,000 and its variable expenses are $80,000, its fixed expenses must be:
A) $16,000.
B) $8,000.
C) $32,000.
D) $24,000.
Margin of Safety
The difference between actual or projected sales and the break-even point, indicating the cushion a business has before it incurs a loss.
Variable Expenses
Expenditures that change in direct correlation with production levels or the quantity of sales, including costs like raw materials and direct labor.
Fixed Expenses
Costs that do not change regardless of the level of production or business activity.
- Acquire knowledge on calculating the margin of safety and understanding its impact on business stability.
- Understand the impact of variable and fixed costs on company profits and break-even point.
Verified Answer
MO
Munachiso OnwuchekwaJul 11, 2024
Final Answer :
C
Explanation :
Total Sales = $120,000
Total Variable Expenses = $80,000
Contribution Margin = Total Sales - Total Variable Expenses = $120,000 - $80,000 = $40,000
Margin of Safety = Total Sales - Break-Even Sales
$24,000 = $120,000 - Break-Even Sales
Break-Even Sales = $120,000 - $24,000 = $96,000
Break-Even Sales = Total Fixed Expenses / Contribution Margin
$96,000 = Total Fixed Expenses / $40,000
Total Fixed Expenses = $96,000 x $40,000 = $32,000
Total Variable Expenses = $80,000
Contribution Margin = Total Sales - Total Variable Expenses = $120,000 - $80,000 = $40,000
Margin of Safety = Total Sales - Break-Even Sales
$24,000 = $120,000 - Break-Even Sales
Break-Even Sales = $120,000 - $24,000 = $96,000
Break-Even Sales = Total Fixed Expenses / Contribution Margin
$96,000 = Total Fixed Expenses / $40,000
Total Fixed Expenses = $96,000 x $40,000 = $32,000
Learning Objectives
- Acquire knowledge on calculating the margin of safety and understanding its impact on business stability.
- Understand the impact of variable and fixed costs on company profits and break-even point.