Question

Chillmax Company had planned to sell 3,500 pairs of shoes at $60 each in the coming year. Unit variable cost is $21 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $78,000 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 3,500 units sold is $58,500. The degree of operating leverage is 2.3. Now Chillmax expects to increase sales by 10% next year.

Required:1. Calculate the margin of safety in terms of the number of units.2. Calculate the margin of safety in terms of sales revenue.

Answer 1

Margin of safety (units)= 1,500 units

Margin of safety (dollars)= $90,000

Step-by-step explanation:

Giving the following information:

Sales= 3,500 units

Selling price= $60

Unitary variable cost= $21

Total fixed cost equals $78,000

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

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 78,000/ (60 - 21)

Break-even point in units= 2,000 units

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

Break-even point (dollars)= 78,000/ (39/60)

Break-even point (dollars)= $120,000

Now, we can determine the margin of safety:

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

Margin of safety (units)= 3,500 - 2,000= 1,500 units

Margin of safety (dollars)= 210,000 - 120,000= $90,000