Question

Zhao Co. has fixed costs of $390,600. Its single product sells for $181 per unit, and variable costs are $119 per unit. If the company expects sales of 10,000 units, compute its margin of safety in dollars and as a percent of expected sales.

Answer 1

Answer:

37 %

Explanation:

Margin of safety is the difference between expected profit and the break-even point. It is expressed as a percentage of the sales level. the formula is as below

the margin of safety = budgeted sales - break-even/ budgeted sales x 100

For Zhao Co.  ltd break-even point is:

Using the contribution margin formula,

break-even = fixed cost/contribution margin per unit

Fixed cost = $390, 600

Contribution margin per unit = Selling price - variable costs

=$181- $119= $62

Breakeven in units = $390,000 / $62 =$6300 units

Break even in dollars = $6300 x $181= 1, 140,300

Expected sales = 10,000 units

sales in dollars = 10,000 x $181=  1, 810, 000

The margin of safety

=  1 810,000- 1140,000/ 1810,000 x 100

=670,000/1810,000 x 100

=0.370165 x 100

=37.016 %

= 37 %