Question

Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month’s budget appear below: Selling price per unit $ 24 Variable expense per unit $ 18 Fixed expense per month $ 4,800 Unit sales per month 950 Required: 1. What is the company’s margin of safety? (Do not round intermediate calculations.) 2. What is the company’s margin of safety as a percentage of its sales?

Answer 1

1.150 units

2. 15.79%

Step-by-step explanation:

Margin of safety is the difference between the current level of profitability and the break-even level. In other words, it is excess of the current level of sales and the break-even sales computed using the formula below:

the margin of safety in units=current level of sales-breakeven sales

break-even sales=fixed expense/contribution margin

fixed expense=$4,800

contribution margin per unit=selling price-variable cost

contribution margin per unit=$24-$18

contribution margin per unit=$6

break-even sales=$4,800/$6

break-even sales units=800 units

the margin of safety in units=950-800

the margin of safety in units=150 units

the margin of safety as a percentage of its sales=150/950

the margin of safety as a percentage of its sales=15.79%