Question

Exercise 3-11A Margin of safety LO 3-4 Solomon Company makes a product that sells for $34 per unit. The company pays $22 per unit for the variable costs of the product and incurs annual fixed costs of $98,400. Solomon expects to sell 22,400 units of product. Required Determine Solomon's margin of safety expressed as a percentage. (Round your answer to 2 decimal places. (.e., .2345 should be entered as 23.45)) Margin of safety

Answer 1

Margin of safety (in percentage)

= (Current sales level - Break even point) / Current sales level

Current sales level = 22,400 units * selling price

= 22,400 * $34

= $761,600

Break even point = Fixed costs / Contribution margin ratio

Contribution margin ratio = (Selling price - variable cost) / Selling price

= ($34 - $22) / $34

= 35.29%

Break even point = $98,400 / 35.29%

= $278,833

Margin of safety = ($761,600 - $278,833) / $761,600

= $482,767 / $761,600

= 63.39%