Question

Zhao Co. has fixed costs of $429,000. Its single product sells for $187 per unit, and variable costs are $122 per unit. If the company

expects sales of 10,000 units, compute its margin of safety in dollars and as a percent of expected sales.
Dollars
Percent
Margin of safety

Answer 1

$635,000 and : 34%

Step-by-step explanation:

Margins of safety is the difference between expected sales and the break-even point.

For Zhao, expected sales are 10,000 units

The break-even points in units = fixed cost/ contribution margin per unit

fixed costs = $429,000

Contribution margin per unit = selling price - variable costs per unit

=$187 - $122

=$65

break-even point in units = $429,000/$65

break-even point = 6600 units

Margin of safety = 10,000 - 6600 units

=3400 units

In dollars is equal to margin of safety in units x selling price

=3400 x 187

=$635,000

as a percent of expected sales.

=3400/10000 x 100

=0.34 x 10,000

=34%