Question

Pottery Shed sells planters for an average of $55 each. The variable cost of each planet is $30 and fixed costs total $100,000. If sales total $269,500, what is the margin of safety

Answer 1

The margin of safety $49,000

Step-by-step explanation:

Margin of safety is the sales value at which the business is safe from making loss. It measures the profit after the break-even point.

Selling price = $55

Variable cost = $30

Contribution margin = $55 - $30 = $25

Contribution margin ratio = Contribution margin / sales = $25 / $55 = 45.5%

Break-even point = Fixed cost / Contribution ratio = $100,000 / 45.5% = $220,000

Margin of safety = Forecasted Sales - Break-even sales

Margin of safety = $269,500 - $220,000

Margin of safety = $49,000