Question

Zhao Co. has fixed costs of $330,600. Its single product sells for $171 per unit, and variable costs are $114 per unit. If the company expects sales of 10,000 units, compute its margin of safety in dollars and as a percent of expected sales.

Answer 1

Margin of safety in dollars = $718,200

Margin of safety in percent = 42%

Step-by-step explanation:

Data provided in the question:

Fixed costs = $330,600

Selling cost = $171 per unit

Variable cost = $114 per unit

Expected sales = 10,000

Now,

Break-even sales = [ Fixed cost ] ÷ [ Selling price - Variable cost ]

= $330,600 ÷ [ $171 - $114 ]

= 5,800 units

Thus,

Break-even sales in dollar = Break-even sales units × selling price

= 5,800 units × $171

= $991,800

Total sales = Expected sales × Selling cost

= 10,000 × $171

= $1,710,000

Margin of safety in dollars = Total sales - Break-even sales in dollar

= $1,710,000 - $991,800

= $718,200

Margin of safety in percent

= [ Margin of safety in dollars ÷ Total sales ] × 100%

= [ $718,200 ÷ $1,710,000 ] × 100%

= 42%