Question

If a product's selling price is $110 per unit, the variable cost is $45 per unit and fixed costs are $3,000 per month, then the margin of safety in sales dollars is ________, when 125 units are sold in one month. (In your calculations, round to the next whole number.)

a. $8,580
b. $4,025
c. $2,775
d. $2,950

Answer 1

The margin of safety in sales dollars when 125 units are sold at a selling price of $110 per unit, variable cost of $45 per unit, and fixed costs of $3,000 per month is $8,580 option (a).

Step-by-step explanation:

The question requires calculating the margin of safety in sales dollars for a product with certain costs and sales figures. To find the margin of safety, we need to calculate the difference between the actual or expected sales and the break-even sales. For the provided problem:

• Break-even point in units = Fixed Costs / (Selling Price per unit - Variable Cost per unit).
• The break-even point in units = $3,000 / ($110 - $45) = $3,000 / $65 = 46.15 units, rounded to 47 units since we cannot have a fraction of a unit in sales.
• Break-even sales in dollars = Break-even units × Selling Price per unit = 47 units × $110/unit = $5,170.
• Actual sales in dollars = Number of units sold × Selling Price per unit = 125 units × $110/unit = $13,750.
• The margin of safety in dollars = Actual sales - Break-even sales = $13,750 - $5,170 = $8,580.

Therefore, the margin of safety in sales dollars when 125 units are sold in one month is $8,580.