Question

Duck Manufacturing sells rubber rain boots for $50 per pair. In 20x4, the firm had fixed costs of $312,000 and variable costs of $24 per pair, and it expects these figures to remain the same in 20x5. In 20x4, Duck’s total sales were $900,000, and the company expects this amount to increase to $925,000 in 20x5. If this sales increase does indeed occur, Duck’s margin of safety ratio will increase by about ________ percent. A : 3.4 B : 2.4 C : 3.2 D : 1.8

Answer 1

Answer:

The correct answer is D.

Explanation:

Giving the following information:

Duck Manufacturing sells rubber rain boots for $50 per pair. In 20x4, the firm had fixed costs of $312,000 and variable costs of $24 per pair, and it expects these figures to remain the same in 20x5. In 20x4, Duck’s total sales were $900,000, and the company expects this amount to increase to $925,000 in 20x5.

First, we need to calculate the break-even point in units for 2014 and the margin of safety ratio for 2014.

20x4

Break-even point= fixed costs/ contribution margin

Break-even point= 312,000/(50-24)= 12,000 units

Margin of safety ratio= (current sales level - break-even point)/current sales level

Margin of safety ratio= [(900,000/50)-12,000]/(900,000/50)= 0.3333

20x5:

New Margin of safety= [(925,000/50) - 12,000]/ (925,000/50)

New Margin of safety= (18500 - 12000)/18500= 0.3514

Increase= 35,14 - 33.33= 1.81