Question

A business has variable costs per unit of £9 and total annual fixed costs of £25,200. The budgeted sales is 26,000 units. Calculate the margin of safety in units if the selling price is £19. Round your answer to the nearest integer (if necessary).​

Answer 1

The margin of safety in units is 23,480.

Step-by-step explanation:

The margin of safety is a measure of how much sales can decline before a business starts incurring losses. To calculate the margin of safety in units, we need to find the difference between the budgeted sales and the breakeven point. The breakeven point is the level of sales at which the business covers all its costs and has zero profit or loss.

In this case, the breakeven point can be calculated by dividing the fixed costs by the contribution margin per unit. The contribution margin per unit is the difference between the selling price per unit and the variable cost per unit. So the contribution margin per unit would be £19 - £9 = £10.

The breakeven point in units would be £25,200 / £10 = 2,520 units.

The margin of safety in units would be the difference between the budgeted sales and the breakeven point: 26,000 - 2,520 = 23,480 units.