Final answer:
The margin of safety for Sally's quilt business can be calculated in units (quilts), in sales dollars, and as a percentage of expected sales.
Step-by-step explanation:
To calculate the margin of safety for Sally's quilt business, we need to understand what it represents. The margin of safety is the difference between the expected sales volume and the breakeven sales volume. Let's calculate it:
a. In units (quilts): The breakeven sales volume can be calculated as the fixed expenses divided by the contribution margin, where the contribution margin is the sales price minus the variable cost per unit. In this case, the breakeven sales volume is $100,000 / ($400 - $300) = 2,000 quilts. So, the margin of safety in units is 2,000 - 2,000 = 0 quilts.
b. In sales dollars: The breakeven sales dollars can be calculated as the breakeven sales volume multiplied by the sales price per unit. In this case, the breakeven sales dollars is 2,000 quilts × $400 = $800,000. So, the margin of safety in sales dollars is $800,000 - $800,000 = $0.
c. As a percentage of expected sales: The margin of safety as a percentage of expected sales can be calculated as the margin of safety in sales dollars divided by the expected sales dollars, multiplied by 100%. In this case, the margin of safety as a percentage of expected sales is ($0 / $800,000) × 100% = 0%.