Cost Behavior and Cost-Volume-Profit Analysis?

Question

If the margin of safety for Watkins Company was 25%, fixed costs were $1,200,000, and variable costs were 75% of sales, what was the amount of actual sales (dollars)? 

Hint: Determine the break-even in sales dollars first.



I've been over-analyzing this problem (I'm sure) for over an hour now. I don't know how to determine the break-even sales because I don't know the contribution margin ratio, but I can't determine the contribution margin ratio because I don't know the contribution margin, but I don't know the contribution margin because I have no idea what the variable costs or sales are.... any suggestions to get me started?

EJ (Philippines) · Accepted Answer

Answer:

Contribution margin ratio = 1 - 0.75 = 25%
Break - even sales = $1200000 / 25% = $4800000
Margin of safety = (sales less break - even sales) / sales
Margin of safety = $6400000

rehman vohra · Answer

Margin of safety % is (Actual Sales - Break even sales)/Actual Sales
Breakeven sales = Fixed costs/ contribution margin ratio
= 1,200.000/(1.00-0.75) 
= 4.800,000

Since margin of safety is 25% of actual sales amd margin of safety is Actual - break even sales, then the break even sales must equal 75%. Therefoe actual sales = 4,800,000/ 0.75 = $6,400,000

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Cost Behavior and Cost-Volume-Profit Analysis?

2 Answers