Question

Smith Company produces desk lamps. The information for June indicated that the selling price was $25 per unit, variable costs were $15 per unit, and fixed costs totaled $6,000. Smith currently sells 1,100 lamps and warns $5,000 of profit. How much is Smith’s margin of safety in dollars

Answer 1

Answer: 45.5%

Step-by-step explanation:

Given that,

Selling price = $25 per unit

Variable costs = $15 per unit

Fixed costs = $6,000

Currently sells = 1,100 lamps

Warns $5,000 of profit

Break even point in sales dollars:

Break even point in units =
`(6,000)/(25 - 15)`

= 600 units

Break even point in sales dollars:

= 600 × $25

= $15,000

Margin of safety:

= Current sales - break even sales

= ($25 × 1,100) - $15,000

= $12,500

The Margin of safety ratio is then calculated by dividing the margin of safety in dollars by actual sales:

=
`(12,500)/(27,500)`

= 45.5%