Question

erek's drum depot (ddd) wants to add a new line of drumsticks to its product line. the following data apply to the new drumsticks line. budgeted sales 30,000 sets per year sales price $ 5 per set variable costs $ 3 per set fixed costs $ 10,000 per year the margin of safety for ddd is: multiple choice 83% 15,000 sets 19% 6,000 sets

Answer 1

The margin of safety for Derek's Drum Depot based on the provided data is 83.33%, calculated by finding the difference between the budgeted sales and the break-even point both in units and expressed as a percentage.

Step-by-step explanation:

The student's question involves calculating the margin of safety for Derek's Drum Depot (DDD) based on given data about budgeted sales, sales prices, variable costs, and fixed costs. To answer the question accurately, one must understand the concept of the margin of safety and apply it to the provided information. The margin of safety is the difference between the actual or projected sales and the break-even point, typically expressed either in units or as a percentage. It measures how much sales can drop before a business reaches its break-even point where total revenues equal total costs.

First, calculate the break-even point in units which is fixed costs divided by the contribution margin per unit (sales price - variable cost per set). In this case, the break-even point would be 10,000 / (5 - 3) = 5,000 sets. Knowing that the budgeted sales are 30,000 sets, the margin of safety in units is 30,000 sets - 5,000 sets = 25,000 sets. To express this as a percentage, divide the margin of safety in units by the budgeted sales and multiply by 100, which results in (25,000 / 30,000) * 100 = 83.33%.