Black Company's sales are $565,000, its fixed expenses are $150,000, and its variable expenses are 60% of sales. Based on this information, the margin of safety (number of sales dollars that can be safely lost) is:

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BlackTom AI · Accepted Answer

The question provides Bob’s sales figure, fixed expenses, and the variable expense rate as a percentage of sales. To find the margin of safety in dollars, we first determine the break-even point. The variable expenses are 60% of sales, so the contribution margin ratio (CMR) is 1 - 0.60 = 0.40 (40%). Break-even sales in dollars equal fixed costs divided by the CMR: $150,000 / 0.40 = $375,000. The margin of safety in dollars is actual sales minus break-even sales: $565,000 - $375,000 = $190,000. Therefore, the amount of sales dollars that can be safely lost before reaching break-even is $190,000. This uses the standard margin of safety formula: Margin of Safety = Actual Sales − Break-even Sales, with Break-even Sales = Fixed Costs / Contribution Margin Ratio (CMR). The given data confirms the CMR and break-even calculation, resulting in the margin of safety value computed above.

Black Company's sales are $565,000, its fixed expenses are $150,000, and its variable expenses are 60% of sales. Based on this information, the margin of safety (number of sales dollars that can be safely lost) is:

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