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
