Arthur Corporation has a margin of safety percentage of 20% based on its actual

Question

Arthur Corporation has a margin of safety percentage of 20% based on its actual sales. The break-even point is $340,000 and the variable expenses are 45% of sales. Given this information, the actual profit is: (Do not round your intermediate calculations.)

Arthur Corporation has a margin of safety percentage of 20% based on its actual sales. The break-even point is $340,000 and the variable expenses are 45% of sales. Given this information, the actual profit is: (Do not round your intermediate calculations.)

Explanation / Answer

Actual profit is $ 46,750

Workings:

If variable cost ratio is 45% of sales, contribution margin ratio = (1-0.45) = 0.55, and breakeven sales is computed as Fixed cost / contribution margin ratio

Therefore fixed cost = 340,000 x 0.55 = $187,000

Margin of safety is computed as ( Actual sales - Breakeven sales) / Actual sales x 100

If actual sales is S , (S- 340,000) / S = 0.20 or 0.80 S = 340,000 or S = 425,000.

Therefore, at sales level of $ 425,000, profit = (425,000 x 0.55) - 187,000 = $ 46,750.

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