Awtis Corporation has a margin of safety percentage of 25% based on its actual sales. The break-even point is $376,800 and the variable expenses are 45% of sales. Given this information, the actual profit is:

Awtis Corporation has a margin of safety percentage of 25% based on its actual sales. The break-even point is $376,800 and the variable expenses are 45% of sales. Given this information, the actual profit is:

Multiple Choice

• $69,080

  Correct
• $100,480
• $51,810

  Incorrect
• $18,840

Explanation

CM ratio = 1 – Variable expense ratio

= 1 – 0.45 = 0.55

Dollar sales to break even = Fixed expenses ÷ CM ratio

$376,800 = Fixed expenses ÷ 0.55

Fixed expenses = $376,800 × 0.55 = $207,240

Margin of safety in dollars = Total actual sales – Break-even sales

Margin of safety percentage = Margin of safety in dollars ÷ Total actual sales

Margin of safety percentage = (Total actual sales – Break-even sales) ÷ Total actual sales

Margin of safety percentage = 1 – Break-even sales ÷ Total actual sales

Break-even sales ÷ Total actual sales = 1 – Margin of safety percentage

Total actual sales = Break-even sales ÷ (1 – Margin of safety percentage)

= $376,800 ÷ (1 – 0.25) = $502,400

Profit = (CM ratio × Sales) – Fixed expenses

= (0.55 × $502,400) – $207,240 = $69,080

here