Final answer:
To calculate the margin of safety for Eastwick, divide the fixed costs by the contribution margin. The contribution margin is the difference between the selling price and the variable cost per unit. Eastwick's margin of safety is approximately 12.7%, meaning their sales are 12.7% above the breakeven point.
Step-by-step explanation:
To calculate the margin of safety for Eastwick, we need to find the total revenue and the breakeven point. The breakeven point is the point at which the company's revenue covers all of its costs, including fixed and variable costs. To find the breakeven point, we divide the fixed costs by the contribution margin. The contribution margin is the difference between the selling price and the variable cost per unit.
Given the information provided, the contribution margin per unit for each product can be calculated as follows:
P1: Revenues - Variable Costs = $120,000 - $42,000 = $78,000
P2: Revenues - Variable Costs = $220,000 - $142,000 = $78,000
P3: Revenues - Variable Costs = $220,000 - $124,000 = $96,000
The total contribution margin for all three products is $78,000 + $78,000 + $96,000 = $252,000.
Next, we divide the fixed costs by the contribution margin to find the breakeven point:
Breakeven Point = Fixed Costs / Contribution Margin = $220,000 / $252,000 = 0.873 (approximately)
The margin of safety is the difference between the actual sales volume and the breakeven point. To find the margin of safety, we subtract the breakeven point from 1 and multiply by 100 to get a percentage:
Margin of Safety = (1 - Breakeven Point) x 100 = (1 - 0.873) x 100 = 12.7% (approximately)
Therefore, Eastwick's margin of safety is approximately 12.7%, which means the company's sales are 12.7% above the breakeven point.