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ASHA 777 [7]
3 years ago
5

Zhao Co. has fixed costs of $354,000. Its single product sells for $175 per unit, and variable costs are $116 per unit. If the c

ompany expects sales of 10,000 units, compute its margin of safety in dollars and as a percent of expected sales.
Business
1 answer:
Ipatiy [6.2K]3 years ago
5 0

Answer:

Results are below.

Explanation:

<u>First, we need to calculate the break-even point in units and sales dollars:</u>

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 354,000 / (175 - 116)

Break-even point in units= 6,000

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 354,000 / (59 / 175)

Break-even point (dollars)= $1,050,000

<u>Now, the margin of safety and margin of safety rate:</u>

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

Margin of safety= (10,000*175) - 1,050,000

Margin of safety= $700,000

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

Margin of safety ratio= 700,000 / 1,750,000

Margin of safety ratio= 0.4= 40%

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