Question

Derek's Drum Depot (DDD) wants to add a new line of drumsticks to its product line. The following data apply to the new drumsticks line. Budgeted sales 30,000 sets per year Sales price $ 5 per set Variable costs $ 3 per set Fixed costs $ 10,000 per set year The margin of safety for DDD is:

Answer 1

Margin of safety= 25,000 units

Step-by-step explanation:

Giving the following information:

Budgeted sales 30,000 sets per year

Sales price $ 5 per set

Variable costs $ 3 per set

Fixed costs $ 10,000

First, we need to calculate the break-even point in units:

Break-even point= fixed costs/ contribution margin

Break-even point= 10,000 / (5 - 3)= 5,000 units

Now, we can determine the margin of safety:

Margin of safety= (current sales level - break-even point)

Margin of safety= 25,000 units