Question

Calcu Margin of Safety Chase Company produces and sells strings of colourful indoor/outdoor lights for holiday display to retailers for $11.82 per string. The variable costs per string are as follows: Direct materials Direct labour Variable overhead Variable selling $1.87 1.70 0.57 0.42 Fixed manufacturing cost totals $334,750 per year. Administrative cost (all fixed) totals $398,500. Chase expects to sell 408,250 strings of light next year. Required: Round contribution margin ratio to four decimal places. If required, round your answers to nearest whole value. Use rounded amounts in subsequent requirements. 1. Calculate the break-even point in units. units 2. Calculate the margin of safety in units. units 3. Calculate the margin of safety in dollars.

Answer 1

Solution: Variable Cost per unit = Direct material + Direct labor + Variable overhead + Variable selling expense Variable Cost per unit = $1.87 +$1.70 + $0.57 + $0.42 Variable Cost per unit = $1.87 +$1.70 + $0.57 + $0.42 Variable Cost per unit = $4.56. Selling price per unit = $11.82 Total fixed cost = Fixed manufacturing cost + Administrative cost Total fixed cost = $334,750 + $398,500 Total fixed cost = $733,250. Contribution margin per unit = Selling price per unit - Variable Cost per unit Contribution margin per unit = $11.82 - $4.56 Contribution margin per unit = $7.26. Break even units = Fixed cost/Contribution margin per unit Break even units = $733,250 / $7.26 Break even units = 100,999. Margin of safety in units = Sales in units - Break even units Margin of safety in units = 408,250 - 100,999 Margin of safety in units = 307,251. Sales = Number of units x Selling price per unit Sales = 408,250 x $11.82 Sales = $4,825,515. Break even sales = Break even units x Selling price per unit Break even sales = 100,999 x $11.82 Break even sales = $1,193,808. Margin of safety in sales revenue = Sales - Break even sales Margin of safety in sales revenue = $4,825,515 - $1,193,808 Margin of safety in sales revenue = $3,631,707.