3-21 Margin of Safety The margin of safety is the excess of budgeted or actual sales over the breakeven sales volume. It shows the amount by which sales may decrease before losses occur. This concept may be expressed as a percentage through dividing the dollar margin of safety by budgeted or actual sales (M/S). The validity of such a margin depends on the accuracy of cost esti- mates at the contemplated breakeven point. Often any drastic decrease in sales is accompanied by severe slashes in costs; the margin of safety is an ap- proximation that presupposes given cost relationships. The Axel Swang Company has the following data:

BUDGET (300,000 UNITS)
Sales $930,000 (100%)
Variable costs 325,500 (35%)
Contribution margin $604,500 (65%)
Fixed costs 520,000 Net income $ 84,500 Since management is not satisfied with the projected net income, it is con- sidering four independent possibilities: (1) increase unit volume 10 percent; (2) increase unit selling price 10 percent; (3) decrease unit variable costs 10 percent; or (4) decrease fixed costs 10 percent. 1. Compute the breakeven sales and the margin of safety as a percentage of sales. 2. Rank the four action possibilities in terms of net income. Show computations. Are the four possibilities likely to be independent? Why?