Question

Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month's budget appear below: Selling price per unit $ 26 Variable expense per unit $ 15 Fixed expense per month $ 9,460 Unit sales per month 1,010 Required: 1. What is the company's margin of safety? (Do not round intermediate calculations.) 2. What is the company's margin of safety as a percentage of its sales? (Round your percentage answer to 2 decimal places (i.E. .1234 should be entered as 12.34).)

Answer 1

Answer and Explanation:

The computation is shown below:

1. The company margin of safety in dollars is

The Margin of safety is

= Actual sales - break even sales

where,

The actual sales is

= 1,010 units × $26

= $26,260

And the break even sales is

= Fixed cost ÷ contribution margin ratio

= $9,460 ÷ {($26 - $15) ÷ ($26)} × 100

= $22,364

Now the margin of safety in dollars is

= $26,260 - $22,364

= $3,896

2. The percentage would be

= Margin of safety ÷ Actual sales × 100

= $3,896 ÷ $26,260 × 100

= 14.84%