Chapter 21, Problem E21.38E

To determine

Margin of Safety:

The margin of safety is a sale over and above the break even sales. This represents safety margin for the business that means the firm will have the safety cushion of dropping the sales till margin of safety level in case of undue circumstances and even then it will not be incurring any losses.

The margin of safety is computed as excess of actual sales over Break-even sales. In other way, it could also be computed by dividing the net income earned by contribution margin ratio to arrive at the margin of safety in terms of $ sales.

The margin of safety can also be represented as % of total sales which means the sales may dropped to that percentage without incurring any losses in undue circumstances.

Requirement1:

Margin of safety in terms of $ sales.

To determine

Requirement2:

Margin of safety as % of total sales.