Question

Mitchell Corporation manufactures a single product. The selling price is $85 per unit, and variable costs amount to $68 per unit. The fixed costs are $16,500 per month. What will be the monthly margin of safety (in dollars) if 1,800 units are sold each month

Answer 1

Answer: $ 70,500

Explanation:

Given, Number of units = 1800

Per unit selling price = $85

Total Sales price = (Number of units ) x (Per unit selling price)

= 1800 x $ 85

= $153,000

Variable cost  per unit = $68

Total variable cost = 1800 x $68 = $122,400

Contribution Margin = (Sales price ) - (Variable cost)

= $ (153000-122400)

= $30,600

Fixed cost = $16,500 per month

Profit = (Contribution Margin) - (Fixed cost)

= $(30,600-16,500)

= $14,100

PV ratio = (Contribution Margin) ÷ (Total sales) x 100%

= $ (30,600÷153,000)x 100%

=20%

Margin of Safety = (profit)  ÷ (PV ratio)

= ($14,100) ÷ (20%)

= ($14,100) ÷ (0.20)

= $ 70,500

Hence, the monthly margin of safety =  $ 70,500