ACCA Applied Skills · Performance Management · Cost-volume-profit analysis (CVP)
Tandy Co sells a product with a contribution to sales ratio of 40%. Fixed costs are $180,000 per period. Sales are budgeted at $600,000. What is the margin of safety as a percentage of budgeted sales?
The margin of safety is 25%. Break-even revenue is fixed costs of $180,000 divided by the 40% contribution ratio, giving $450,000. Budgeted sales of $600,000 exceed this by $150,000, which is 25% of budget.
- A25%Correct
- B30%
- C40%
- D75%
Explanation
Break-even sales = 180,000 / 0.40 = $450,000. Margin of safety = (600,000 - 450,000) / 600,000 = 25%. 75% is the break-even sales as a percentage of budget, not the margin of safety.
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