Gibson Company makes a product that sells for $30 per unit. The company pays $11 per unit for the variable costs of the product and incurs annual fixed costs of $161,500. Gibson expects to sell 22,600 units of product.
Required
Determine Gibson’s margin of safety expressed as a percentage. (Round your answer to 2 decimal places (i.e., .2345 should be entered as 23.45).)
Homework Answers
Answer:
Margin of Safety = 62.39%
Explanation:
Given,
Sales price per unit = $30
Variable costs per unit = $11
Contribution per unit = $30 - $11 = $19
Fixed costs = $161,500
Break even sales ( in units) = Fixed cost ÷Contribution Per unit
= $161,500 ÷ 19
= 8500 units.
Margin of Safety =
[Current sales level - Break-even sales level] ÷ Current sales level * 100
= [ (22,600 - 8500 ) ÷ 22,600] * 100
=( 14,100 ÷ 22,600 ) * 100
= 62.3893
= 62.39 %
i.e., Margin of safety ( in percentage) = 62.39
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