Question

A business produces a product that is sold for​ £10 each. Variable costs are​ £4 for each product and total fixed costs are​ £2,400. During the​ year, the business sold 600 units of the product. What is the​ 'margin of​ safety'?

A. 240 units
B. 360 units
C. 400 units
D. 200 units

Answer 1

The margin of safety is calculated by subtracting the breakeven point from the actual sales volume and dividing by the actual sales volume. In this case, the margin of safety is 200 units.

Step-by-step explanation:

The margin of safety is a measure of how far sales can drop before a business starts to experience a loss. It is calculated by subtracting the breakeven point (where total revenue equals total cost) from the actual sales volume and dividing by the actual sales volume. In this case, the business sold 600 units of the product and the breakeven point can be calculated as follows:

Breakeven point = Total fixed costs / Selling price per unit - Variable cost per unit
Breakeven point = £2,400 / (£10 - £4) = 400 units

Margin of safety = (Actual sales volume - Breakeven point) / Actual sales volume
Margin of safety = (600 - 400) / 600 = 200 / 600 = 1/3 = 33.3%

Therefore, the margin of safety is 200 units (option D).