Current operating income for Bay Area Cycles Co. is $28,000. Selling price per u

Question

Current operating income for Bay Area Cycles Co. is $28,000. Selling price per unit is $100, the contribution margin ratio is 20%, and fixed expense is $112,000.

OK I have this part correct. The break even point in units is 5600 and $560,000 in dollars.

Calculate Bay Area Cycle’s margin of safety and margin of safety ratio.

This is what I do not undersand; Margin of Safety = Total Sales - Break Even Sales. I do not know how to get "total sales" and complete this equation. Please explain. Thank you.

Current operating income for Bay Area Cycles Co. is $28,000. Selling price per unit is $100, the contribution margin ratio is 20%, and fixed expense is $112,000.

Explanation / Answer

The answer to Break even point is correct. Here is how sales is calculated

Let the number of units sold be X

Revenue = 100 * X

Contribution = 20% of 100X = 20X

Fixed Costs = 112000

Profit = 28000 ; but we know that Profit = Contribution - Fixed Cost

So , 28000 = 20X - 112000

20X = 28000 + 112000 = 20X = 140000

So, X = 7000 units

Margin of safety ( Units) = 7000 - 5600 = 1400 units

Margin of safety ( Amount) = 140000 - 112000 = 28000

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