Question

Zhao Co. has fixed costs of $403,200. Its single product sells for $183 per unit, and variable costs are $120 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:

Margin of safety in dollars = $658800

Margin of safety percentage = 0.36 or 36%

Explanation:

The margin of safety in dollars is the number of revenue that a business earns in excess of its break even level of revenue. Thus, the formula for the margin of safety in dollars is,

Margin of safety in dollars = Revenue at current sales level - Revenue at break even sales level

We must first determine the level of sales at the break even point.

The break even point in dollars can be calculated as follows,

Break even in dollars = Fixed cost / Contribution margin ratio

Where,

Contribution margin ratio = (Selling price per unit - Variable cost per unit) / Selling price per unit

Break even in dollars = 403200 / [(183 - 120) / 183]

Break even in dollars = $1171200

Margin of safety in dollars = (10000 * 183) - 1171200

Margin of safety in dollars = $658800

Break even point in units = 1171200 / 183 = 6400 units

Margin of safety as a percentage of expected sales is,

Margin of safety percentage = (10000 - 6400) / 10000

Margin of safety percentage = 0.36 or 36%