Akron Corp. had a margin of safety of $500,000 last month, with sales revenue of $1,250,000 and fixed costs of $150,000.a. What are break-even sales?b. What is the contribution margin ratio?c. How much profit did Akron earn last month?d. How much would sales have to be for Akron to earn profit of 500,000?
What will be an ideal response?
a. $750,000 = $1,250,000 - $500,000
b. 20% = $150,000/$750,000
c. $100,000 = ($1,250,000 × 20%) - $150,000
d. $3,250,000 = [($150,000 + $500,000)/0.20]
Margin of safety = Actual sales - Break-even sales. Break-even sales = Fixed costs/Contribution margin ratio. Target sales = (Fixed costs + Target profit)/Contribution margin ratio.
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