ExpertMedium2 marksShort Answer
ACCA · Question 7 · CVP Analysis
Section A
AeroFly operates a regional airline. The company has fixed costs of $2,000,000 per month. The average Contribution to Sales (C/S) ratio across all flights is 40%. AeroFly's budgeted monthly revenue is $6,250,000.
Calculate the Margin of Safety as a percentage of budgeted revenue. (Enter the percentage number only, e.g., 20).
Section A
AeroFly operates a regional airline. The company has fixed costs of $2,000,000 per month. The average Contribution to Sales (C/S) ratio across all flights is 40%. AeroFly's budgeted monthly revenue is $6,250,000.
Calculate the Margin of Safety as a percentage of budgeted revenue. (Enter the percentage number only, e.g., 20).
How to approach this question
Step 1: Calculate Breakeven Revenue = Fixed Costs / C/S ratio. Step 2: Calculate Margin of Safety = (Budgeted Revenue - Breakeven Revenue) / Budgeted Revenue * 100.
Full Answer
Breakeven Revenue = $2,000,000 / 0.40 = $5,000,000.
Margin of Safety ($) = Budgeted Revenue - Breakeven Revenue = $6,250,000 - $5,000,000 = $1,250,000.
Margin of Safety (%) = ($1,250,000 / $6,250,000) × 100 = 20%.
Common mistakes
Dividing the Margin of Safety by the Breakeven Revenue instead of the Budgeted Revenue.
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