What is the margin of safety? What are the three ways it can be expressed?
The margin of safety is a cushion between profit and loss.
The expected sales beyond breakeven sales is known as margin of safety. As a result, the margin of safety is the amount sales can drop before the company suffers an operating loss. It is like a cushion between profit and loss.
England Productions performs London shows. The average show sells 1,300 tickets at$60 per ticket. There are 175 shows per year. No additional shows can be held as thetheater is also used by other production companies. The average show has a cast of65, each earning a net average of $340 per show. The cast is paid after each show. Theother variable cost is a program-printing cost of $8 per guest. Annual fixed costs total$728,000.
1. Compute revenue and variable costs for each show.
2. Use the equation approach to compute the number of shows England Productionsmust perform each year to break even.
3. Use the contribution margin ratio approach to compute the number of showsneeded each year to earn a profit of $5,687,500. Is this profit goal realistic? Giveyour reasoning.
4. Prepare England Productions’s contribution margin income statement for175 shows performed in 2018. Report only two categories of costs: variableand fixed.
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