Question

question 13

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Delectable Foods produces a gourmet condiment that sells for $20 per unit. Variable cost is $8 per unit, and fixed costs are $5,000 per month. If Delectable expects to sell 1,500 units, compute the margin of safety in dollars. (Round any intermediate calculations to the nearest whole unit, and your final answer to the nearest dollar.) A. $21,660 B. $8,664 C. $5,000 OD. $1,083

Answer 1

Correct answer: A. $ 21,660

Computation of margin of safety in sales dollars is as follows:

Margin of safety in dollars = Operating Income / Contribution margin ratio

= $ 13,000 / 60 %

= $ 21660

Margin of safety is $ 21,660

Working note:

Operating income = ( Expected Number of unit sold * Contribution margin per unit ) - Fixed cost

= ( 1500 * $ 12 ) - $ 5,000

= $ 18,000 - $ 5,000

= $ 13,000

Contribution Margin per unit = Selling price per unit - Variable cost per unit

= $ 20 - $ 8

= $ 12

Contribution Margin ratio = ( Contribution Margin per unit/ Selling price per unit ) * 100

= ( $ 12 / $ 20 ) * 100

= 60%