Asked by Rossi Lopez on Jul 04, 2024
Verified
If the company wants its margin of safety to equal $35,000 next year, all other factors remaining the same, how many units will it need to sell (round your final answer to the nearest whole number)
A) 1,833.
B) 833.
C) 1,000.
D) 1,583.
Margin of Safety
The difference between actual or expected sales and the break-even point, representing the cushion against potential losses.
Variable Cost
Expenses that change in proportion to the activity of a business, such as costs for raw materials or production supplies.
Fixed Costs
Expenses that do not vary with the level of production or sales, such as rent, salaries, and insurance.
- Calculate the margin of safety and understand its implications for business risk.
Verified Answer
ZK
Zybrea KnightJul 07, 2024
Final Answer :
D
Explanation :
The margin of safety in dollars is desired to be $35,000. To find the required sales in units, we first calculate the break-even point in units, then add the units equivalent to the margin of safety. Break-even point in units = Fixed Costs / (Sales price per unit - Variable cost per unit) = $42,000 / ($60 - $18) = $42,000 / $42 = 1,000 units. To achieve a margin of safety of $35,000, we convert this dollar amount into units by dividing by the sales price per unit: $35,000 / $60 = 583.33 units. Adding this to the break-even units gives 1,000 + 583.33 = 1,583.33 units, which rounds to 1,583 units.
Learning Objectives
- Calculate the margin of safety and understand its implications for business risk.