Final answer:
To calculate the break-even point and margin of safety for Farmer Jane, we need to understand the concepts of fixed costs, variable costs, and total revenue. The break-even point is the level of sales at which total revenue equals total costs, resulting in zero profit or loss. The margin of safety is the difference between the actual sales volume and the break-even point, indicating how much sales can decline before the business starts making a loss.
Step-by-step explanation:
To calculate the break-even point and margin of safety for Farmer Jane, we need to understand the concepts of fixed costs, variable costs, and total revenue.
The break-even point is the level of sales at which total revenue equals total costs, resulting in zero profit or loss. To find the break-even point, we can use the formula:
Break-even point = Fixed costs / (Selling price per unit - Variable cost per unit)
In this case, Farmer Jane's fixed cost is $2500 per month, the selling price per unit is $3, and the variable cost per unit is $1. Plugging these values into the formula, we get:
Break-even point = $2500 / ($3 - $1)
Break-even point = $2500 / $2 = 1250 units
Therefore, Farmer Jane needs to sell 1250 pounds of tomatoes each month to break even.
The margin of safety is the difference between the actual sales volume and the break-even point. It indicates how much sales can decline before the business starts making a loss. To calculate the margin of safety, we can use the formula:
Margin of safety = Actual sales - Break-even point
In this case, the actual sales are 5000 pounds of tomatoes per month. Plugging this value into the formula, we get:
Margin of safety = 5000 - 1250 = 3750 pounds
Therefore, Farmer Jane has a margin of safety of 3750 pounds of tomatoes.