Question

A company makes a single product that it sells for $16 per unit. Fixed costs are $76,800 per month and the product has a contribution margin ratio of 40%. If the company's actual sales are $224,000, its margin of safety is:

Answer 1

Answer:

Margin of safety = 2,000 units

Explanation:

Margin of Safety =Total units sold-Break-even point

where Total units sold = $\frac{Actual Sales}{Selling price/unit}= \frac{224,000}{16}$=14,000 units

Break even point = $\frac{Total Fixed Costs}{Contribution/unit}$

The contribution per unit can be deduced from the contribution margin ratio as follows:

Contribution margin ratio=$\frac{ContributionMargin}{Sales}$=40%

this implies that Contribution Margin=40%*Sales

Given a selling price of $16/unit, contribution per unit = 0.4*$16=$6.40

therefore :

Break even point = $\frac{76,800}{6.40}$=12,000 Units

Margin of Safety =Total units sold-Breakeven point= 14,000 units -12,000 units = 2,000 units