Question

Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month's budget appear below: A TA Selling price per unit Variable expense per unit Fixed expense per month Unit sales per month $ 25 14 $ 8,910 960 Required: 1. What is the company's margin of safety? (Do not round intermediate calculations.) 2. What is the company's margin of safety as a percentage of its sales? (Round your percentage answer to 2 decimal places (i.e. .1234 should be entered as 12.34).) 1. Margin of safety (in dollars) 2. Margin of safety percentage %

Answer 1

1. Margin of safety (dollars) = $3,750

2. Margin of safety (percentage) = 15.63 %

Explanation

1. Contribution margin ratio = (Selling Price per unit - Variable Expense per unit) / Selling Price per unit

= ($25 - $14) / $25

= $11 / $25

= 44%

Break-even sales = Fixed expense / Contribution margin ratio

= $8,910 / 44%

= $20,250

Margin of safety (dollars) = Actual sales - Break-even sales

= ($25 x 960) - $20,250

= $24,000 - $20,250

= $3,750

2. Margin of safety (percentage) = (Margin of safety / Actual sales) *100

= ($3,750 / $24,000) * 100

= 15.63 %