Chapter 21, Problem 11QS

To determine

Introduction:

Margin of Safety is calculated by subtracting Break- even Sales from the Actual Sales of a concern. It depicts the excess of Total Sales from the Break- even Point. It is the Net Revenue earned after paying for all the Fixed and Variable Costs of the concern.

Break- even point is calculated by dividing Total Fixed Costs incurred by Contribution Margin per unit of the product. It is a point where Total Revenue equals the Total Costs of the concern. In simple terms, it is the point where there is no profit or loss. After this point, Revenue begins to exceed the Costs incurred.

Contribution Margin is the excess between Selling Price and Total Variable Costs associated with the product. It is that proportion of Revenue which is left after deduction of Total Variable Costs.

To determine:

Margin of Safety (a) in dollars and (b) as a percent of expected sales of Zhao Co.