Question

Rooney Company makes a product that sells for $31 per unit. The company pays $18 per unit for the variable costs of the product and incurs annual fixed costs of $105,300. Rooney expects to sell 21,700 units of product. Required Determine Rooney’s margin of safety expressed as a percentage.

Answer 1

Contribution margin per unit

Contribution margin per unit = Selling price per unit – Variable cost per unit

= $31.00 per unit - $18.00 per unit

= $13.00 per unit

Break-even sales volume in units

Break-even sales volume in units = Break-even sales in dollars / Selling price per unit

= $105,300 / $13.00 per unit

= 8,100 units

Break-even sales in dollars

Break-even sales in dollars = Break-even sales volume in units x Selling price per unit

= 8,100 units x $31.00 per unit

= $251,100

Margin of safety in Dollars

Margin of safety in Dollars = Actual sales - Break-even sales in dollars

= [21,700 units x $31.00 per unit] - $251,100

= $672,700 - $251,100

= $421,600

Margin of safety in Dollars

Therefore, the Margin of safety in Percentage = [Margin of safety in Dollars / Actual sales] x 100

= [$421,600 / $672,700] x 100

= 62.67%

“Hence, the Rooney’s margin of safety expressed as a percentage will be 62.67%”