Margin of safety Organic Health Care Products Inc. expects to maintain the same

Question

Margin of safety Organic Health Care Products Inc. expects to maintain the same inventories at the end of 20Y8 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during 20Y8. A summary report of these estimates is as follows: Estimated Variable Cost Estimated Fixed Cost (per unit sold) Production costs: Direct materials Direct labor Factory overhead $8.00 3.00 1.50 $ 200,000 Selling expenses: Advertising Sales salaries and commissions Travel Miscellaneous selling expense 1,450,000 93,000 340,000 2,000 1.85 0.10 Administrative expenses: Office and officers' salaries 300,000 Supplies 10,000 0.50

Explanation / Answer

Break even point=2400000/(25-15) = 240000 1 Margin of safety in units=400000-240000=160000 2 Margin of safety in dollars=160000*25= $4000000 3 Margin of safety as a percentage=160000/400000=40%

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