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		$30	per unit
Variable expenses		$20	per unit
Fixed expenses		$7,500	per month
Unit sales		1,000	units per month

Required:

1. Compute the company’s margin of safety.

  

2. Compute the company’s margin of safety as a percentage of its sales.

Answer 1

1. Contribution margin ratio = ($30 - $20) / $30 = 0.3333 or 33.33%

Break-even sales = Fixed expenses / Contribution margin ratio = $7,500 / 0.3333 = $22,500

Margin of safety = Acutal sales - Break-even sales

Margin of safety = (1,000 units × $30) - $22,500

Margin of safety = $7,500

2. Margin of safety as a percentage of its sales = Margin of safety / Actual sales

Margin of safety as a percentage of its sales = $7,500 / $30,000

Margin of safety as a percentage of its sales = 0.25 or 25%