Answered: margin of safety

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Explain margin of safety and why it is an important measurement for managers. Jakarta Company is a service firm with current service revenue of $400,000 and a 40% contribution margin. Its fixed costs are $80,000. Maldives Company has current sales of $6,610,000 and a 45% contribution margin. Its fixed costs are $1,800,000.

A. What is the margin of safety for Jakarta and Maldives?

B. Compare the margin of safety in dollars between the two companies. Which is stronger?

C. Compare the margin of safety in percentage between the two companies. Now, which one is stronger?

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