Question

Margin of safety Organic Health Care Products Inc. expects to maintain the same inventories at the end of 2048 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during 2078. A summary report of these estimates is as follows: Estimated Variable Cost Estimated Fixed Cost (per unit sold) Production costs: Direct materials Direct labor Factory overhead Selling expenses: Advertising Sales salaries and commissions $ 8.00 3.00 1.50 $ 200,000 1.85 1,450,000 93,000 340,000 2,000 Travel 0.10 Miscellaneous selling expense Administrative expenses: Office and officers' salaries Supplies 300,000 10,000 5,000 0.50 0.05 Miscellaneous administrative expense Total $2,400,000 $15.00 It is expected that 400,000 units will be sold at a price of $25 a unit. Maximum sales within the relevant range are 500,000 units. Determine the following based upon the estimates for 20Y8: 1. Margin of safety for 2048 in units sold. 2. Margin of safety for 20Y8 in sales dollars. 3. Margin of safety for 2048 as a percentage of sales.

Answer 1

Total fixed costs	2400000
Divide by Unit Contribution margin	10	=25-15
Break even sales	240000
1
Margin of safety for 20Y8 in units sold	160000	=400000-240000
2
Margin of safety for 20Y8 in sales dollars	4000000	=160000*25
3
Margin of safety for 20Y8 as a percentage of sales	40%	=160000/400000