Question

Marketing Addis prepares marketing plans for growing businesses. For 2017, budgeted revenues are $1,500,000 based on 500 marketing plans at an average rate per plan of $3,000. The company would like to achieve a margin of safety percentage of at least 45%. The company’s current fixed costs are $400,000 and variable costs average $2,000 per marketing plan. Which of the following changes would help Marketing Docs achieve its desired margin of safety? a) The average revenue per customer increases to $4,000. b) The planned number of marketing plans prepared increases by 5%. c) Marketing Addis purchases new software that results in a 5% increase to fixed costs but reduces variable costs by 10% per marketing plan.

Answer 1

1. Break even points = 400 units

margin of safety = $100

Explanation:

Given data:

budget revenue in 2017 = $1,500,000

Fixed cost =$400,000

total marketing plan = 500

take contribution margin/unit = Revenue - variable cost

= 3000 - 2000

contribution margin/unit = $1000

take break even sales $400

break even point

Break even point

margin of safety is calculated as

margin of safety = total quantity to be sold - break even sales

= 500 - 400 = $100

2. A.

(1)

Break even in marketing plan = 400

(2) Break-even in dollars:

= Break-even in marketing plan × Average rate per plan

= 400 × 3,000

= 1,200,000

(3) Margin of safety = Actual sales - Break-even sales in dollars

= 1,500,000 - 1,200,000

= 300,000

= 20%

B.

(1) Contribution margin per marketing plan = Sales - Variable cost

= $4,000 - $2,000

= $2,000

Break even in marketing plan = 200

(2) Break-even in dollars:

= Break-even in marketing plan × Average rate per plan

= 200 × 4,000

= 800,000

(3) Margin of safety = Actual sales - Break-even sales in dollars

= 1,500,000 - 800,000

= 700,000

= 47%

Therefore, option (a) would achieve the margin of safety ratio more than 45%.

Explanation: