Question

Margin of Safety Head-First Company plans to sell 4,920 bicycle helmets at $74 each in the coming year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Break-even units equal 1,707. Required: 1. Calculate the margin of safety in terms of the number of units. units 2. Calculate the margin of safety in terms of sales revenue.

Answer 1

1.

Margin of safety in units = 4920 - 1707 = 3,213

2.

Margin of safety in dollars = 3213 X $74 = $237,762

Contribution margin = 11.70 - 1.87 - 1.70 - 0.57 - 0.42 = 7.14

Fixed cost = 481950 + 387702 = 869652

1.

Breakeven point = 869652 / 7.14 = 121,800 units

2.

Margin of safety in units = 216700 - 121800 = 94,900 units

3.

Margin of safety in dollars = 94900 X 11.70 = $1,110,330

4.

Decrease in selling price increases the risk for the company. Decrease in selling price leads to decrease in contribution margin which leads to increase in the breakeven point.