Question

Peach Company sells a single product for $63 with variable costs of $21 per unit. Peach’s total monthly fixed costs are $63,000. During April actual sales were 3,100 units. How much is the margin of safety for April? A :

Answer 1

Answer:

The margin of safety for April, expressed as a difference and as percent:

• 1,600 units

• 51.6%

Explanation:

The margin of safety is the how much the sales exceed the breakeven volume of sales.

1. Calculate the breakeven volume:

Equation:

• Variable costs    +    fixed costs    =    Revenue

                   ↓                          ↓                          ↓

                 21x             +      63,000        =        63x

Solve for x:

• 63x - 21x = 63,000

• 42x = 63,000

• x = 1,500 units

2. Margin of safety:

• Margin of safety = Actual sales - Breakeven volume

• Margin of safety = 3,100 units - 1,500 untis = 1,600 units

You can report the margin of safety as the difference, 1,600 units, or as a percent of the sales:

• Percent = (1,600 units / 3,100 units) × 100 = 51.6%