Question

For Crane Company, sales is $1700000 (8500 units), fixed expenses are $480000, and the contribution margin per unit is $60. What is the margin of safety in dollars

Answer 1

Answer:

The Margin of safety is $100,000

Explanation:

Price = Sales / number of units = $1,700,000 / 8500 = $200

Contribution margin ratio is the ratio of contribution margin to the sales value. It measure the ratio that contributes in the recovery of fixed cost and making profit.

Contribution margin ratio = Contribution margin / Sale price = $60 / $200 = = 0.3 = 30%

Break-even is the level of sales at which business has no profit no loss situation.

Break-even point = Fixed cost / Contribution margin ratio = $480,000 / 30% = $1600,000

Margin of safety is the level of sales at which the business is safe from making loss. Margin of safety measures the profit after the break-even point.

Margin of Safety = Total sales - Break-even point = $1,700,000 - $1,600,000

= $100,000