Question

Delectable Foods produces a gourmet condiment that sells for $18 per unit. Variable cost is $6 per unit, and fixed costs are $5,000 per month. If Delectable expects to sell 1,500 units, compute the margin of safety in dollars.
A. $1,083
B. $19,494
C. $6,498
D. $5,000

Answer 1

Answer:

B. $19,494

Explanation:

In order to find out the margin of safety in dollars, first we have to compute the break even point in dollars that is shown below:

Break even point = (Fixed cost) ÷ (Profit volume Ratio)  

where,  

Contribution margin per unit = Selling price per unit - Variable expense per unit  

= $18 - $6

= $12

And, Profit volume ratio = (Contribution margin per unit) ÷ (selling price per unit) × 100

So, the Profit volume ratio = (12) ÷ (18) × 100 = 66.67%

And, the fixed cost is $5,000

Now put these values to the above formula  

So, the value would equal to  

= ($5,000) ÷ (66.67%)  

= $7,500

Now the margin of safety equals to

= Expected sales - break even sales

where,  

Expected sales = Selling price per unit × Unit sales per month

= $18 × 1,500 units

= $27,000

And, the break even sales is $7,500

= $27,000 - $7,500

= $19,500