Question

The following monthly data are available for Fortner Industries which produces only one product which it sells for $18 each. Its unit variable costs are $8, and its total fixed expenses are $17,000. Actual sales for the month of May totaled 2,000 units. Compute the margin of safety in dollars for the company for May.

Answer 1

Margin of safety= $5,400

Step-by-step explanation:

Giving the following information:

Selling price= $18 per unit.

Unit variable costs= $8

Total fixed expenses are $17,000

Actual sales for May totaled 2,000 units.

First, we need to calculate the break-even point in dollars for May.

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 17,000 / [(18 - 8)/18]

Break-even point (dollars)= $30,600

Now, we can calculate the margin of safety in dollars:

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

Margin of safety= (2,000*18) - 30,600

Margin of safety= $5,400