Question

Flannigan Company manufactures and sells a single product that sells for $450 per unit; variable costs are $300. Annual fixed costs are $870,000. Current sales volume is $4,200,000. Compute the current margin of safety in dollars for Flannigan Company.

$2,612,612.

$1,587,388.

$2,460,000.

$1,560,000.

$2,895,652.

Answer 1

$1,590,000

Step-by-step explanation:

The computation of the current margin of safety in dollars is shown below:

Margin of safety = Expected sales - break even sales

where,

Expected sales = (fixed expense) ÷ (contribution margin ratio)

= ($870,000) ÷ (33.33%)

= $2,610,000

The contribution margin ratio equals to

= (Contribution margin per unit) ÷ (selling price per unit) × 100

where,

Contribution margin per unit = Selling price per unit - Variable expense per unit

= $450 - $300

= $150

So, the Profit volume ratio = ($150) ÷ ($450) × 100 = 33.33%

So, the margin of safety would be

= $4,200,000 - $2,610,000

= $1,590,000

This is the answer and same is not provided in the given options