Question

Assume a company sells a single product. If Q equals the level of output, p is the selling price per unit, v is the variable expense per unit, and F is the fixed expense, then the safety margin in dollars is: Ans:

a. F/[Q(p-v)].
b. Q*p - F/[Q(p-v)].
c. Q*p - F/[(p-v)/p].
d. F/[(p-v)/p].

Answer 1

c. Q*p - F/[(p-v)/p].

Step-by-step explanation:

The safety margin represent the difference between the current level of sales and the break even point.

The current sales will be Q x p

While break even is as follow:

`(Fixed\:Cost)/(Contribution \:Margin \:Ratio) = Break\: Even\: Point_(dollars)`

Where:

`Sales \: Revenue - Variable \: Cost = Contribution \: Margin`

`(Contribution \: Margin)/(Sales \: Revenue) = Contribution \: Margin \: Ratio`

Thus will be:

`(Fixed\:Cost)/((Sales \: Revenue - Variable \: Cost)/(Sales \: Revenue)) = Break\: Even\: Point_(dollars)`

Making fit the third formula proposition for the second term.