Margin of Safety Comer Company produces and sells strings of colorful indoor/out
ID: 2565207 • Letter: M
Question
Margin of Safety Comer Company produces and sells strings of colorful indoor/outdoor lights for holiday display to retailers for $15.67 per string. The variable costs per string are as follows: Direct materials $1.87 Direct labor 1.70 Variable factory overhead 0.57 Variable selling expense 0.42 Fixed manufacturing cost totals $675,488 per year. Administrative cost (all fixed) totals $506,616. Comer expects to sell 237,800 strings of light next year. Required: 1. Calculate the break-even point in units. units 2. Calculate the margin of safety in units. units 3. Calculate the margin of safety in dollars. $
Explanation / Answer
Solution:
1) Break Even Point in Units
Break Even Point is the level of sale at which no profit no loss. In other word, at break even point contribution margin is equal to fixed cost of the company.
Break Even Point (in units) = Total Fixed Cost / Per Unit Contribution Margin
Per Unit Contribution Margin = Selling Price 15.67 – Unit Total Variable Expense (1.87+1.7+0.57+0.42)
= 15.67 – 4.56
= $11.11
Total Fixed Cost = Fixed manufacturing cost $675,488 + Administrative cost (all fixed) totals $506,616 = $1,182,104
Break Even Point (in units) = Total Fixed Cost $1,182,104 / Per Unit Contribution Margin $11.11
= 106,400 Units
2) Margin of Safety in Units
Margin of Safety in units = Total Expected Sale Units – Break Even Units = 237,800 – 106,400 = 131,400 Units
3) Margin of Safety in dollars = Total Expected Sale in dollar – Break Even Sale in dollar
Or
Margin of Safety in units x Unit Selling Price
= 131,400 Units x $15.67
= $2,059,038
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