Asked by Christina Rodrigue on May 07, 2024
Verified
A manufacturer of premium wire strippers has supplied the following data: The company's margin of safety in units is closest to: (Round per unit calculations to 2 decimal places.)
A) 234,222 units
B) 564,242 units
C) 45,455 units
D) 457,500 units
Margin Of Safety
The difference between actual or projected sales and the break-even point, indicating the level of risk in a business.
Wire Strippers
A hand tool used to remove the insulation from electric wires to make connections or terminations.
Manufacturer
A business entity engaged in the production of goods through the processing of raw materials and components.
- Compute and elucidate the margin of safety expressed in monetary and percentage values.
Verified Answer
Margin of Safety (in units) = Actual sales - Break-even sales
To calculate the actual sales, we need to use the contribution margin per unit and the actual number of units sold. The contribution margin per unit can be calculated as follows:
Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit
Contribution Margin per Unit = $60 - $48
Contribution Margin per Unit = $12
Now, we can use the following formula to calculate the actual number of units sold:
Actual Sales = Total Sales Revenue / Selling Price per Unit
Actual Sales = $2,580,000 / $60
Actual Sales = 43,000 units
To calculate the break-even sales, we need to use the following formula:
Break-even Sales = Fixed Costs / Contribution Margin Ratio
Contribution Margin Ratio = Contribution Margin per Unit / Selling Price per Unit
Contribution Margin Ratio = $12 / $60
Contribution Margin Ratio = 0.2
Break-even Sales = $1,290,000 / 0.2
Break-even Sales = 21,500 units
Now we can calculate the margin of safety in units:
Margin of Safety = Actual Sales - Break-even Sales
Margin of Safety = 43,000 - 21,500
Margin of Safety = 21,500 units
Therefore, the company's margin of safety in units is 21,500 which is closest to choice C.
Learning Objectives
- Compute and elucidate the margin of safety expressed in monetary and percentage values.
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