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Lady bird [3.3K]
2 years ago
11

Sue sells authentic Amish quilts on her website. Suppose Sue expects to sell 3 comma 000 quilts during the coming year. Her aver

age sales price per quilt is $ 275​, and her average cost per quilt is $ 150. Her fixed expenses total $ 225 comma 000. Compute her margin of safety a. in units​ (quilts). b. in sales dollars. c. as a percentage of expected sales.
Business
1 answer:
e-lub [12.9K]2 years ago
8 0

Answer:

(A) 1,200 Margin of Safety_{units}

(B) 330,000 Margin of Safety_{usd}

(C) Margin of Safety 40% of Sales

Explanation:

(A)

Sales \: Revenue - Variable \: Cost = Contribution \: Margin

275 - 150 = <u>125 CM per unit</u>

\frac{Fixed\:Cost}{Contribution \:Margin} = Break\: Even\: Point_{units}

\frac{225,000}{125} = 1,800 = Break\: Even\: Point_{units}

{units \: sold- BEP_{units} = margin \: of \: safety_{units}

3,000 - 1,800 = 1,200 Margin of Safety_{units}

HOW? we Calculate the contribution per unit. Then the BEP in units and with that the margin of safety in units.

(B)

\frac{Contribution Margin}{Sales Revenue} = $Contribution Margin Ratio

125/275 = 0.45454545 = <u>5/11 CM ratio</u>

\frac{Fixed\:Cost}{Contribution \:Margin \:Ratio} = Break\: Even\: Point_{dollars}

225,000/(5/11) = 495,000 BEP USD

{current \:sales - BEP_{USD} = margin \: of \: safety

825,000-495,000 = 330,000 Margin of Safety_{usd}

HOW? we Calculate the contribution ratio by dividing CM over sales. Then the BEP in dollars and with that the margin of safety in dollars.

<em><u>Important:</u></em> When posible to avoid rounding errors express as fraction iof posible

(C)

\frac{current \:sales - BEP_{USD}}{current \:sales} \times 100 = margin \: of \: safety

\frac{330,000}{825,000} \times 100 = margin \: of \: safety

Margin of Safety 40%

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