Question

Margin of Safety

Comer Company produces and sells strings of colorful indoor/outdoor lights for holiday display to retailers for $11.84 per string. The variable costs per string are as follows:

Direct materials	$1.87
Direct labor	1.70
Variable factory overhead	0.57
Variable selling expense	0.42

Fixed manufacturing cost totals $445,536 per year. Administrative cost (all fixed) totals $339,976. Comer expects to sell 188,900 strings of light next year.

Required:

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.
$

4. Conceptual Connection: Suppose Comer actually experiences a price decrease next year while all other costs and the number of units sold remain the same. Would this increase or decrease risk for the company? (Hint: Consider what would happen to the number of break-even units and to the margin of safety.)

Answer 1

	Calculation of BEP and MOS
a	Sales in units		188,900 strings
b	Sales Per string		$11.84
c	Less:Variable Cost per string
	Direct Material per string	$1.87
	Direct Labor per string	1.70
	Variable Factory overhead per string	0.57
	Variable Selling expense per string	0.42	$4.56
d	Contribution Margin per string		$7.28
	(Sales value per string-Variable cost per string)
e	Contribution in $(a*d)		$1,375,192
f	Sales in $(a*b)		$2,236,576
g	Contribution Margin Ratio(e/f)		61.49%
h	Break even point in Dollars
	(Total Fixed Expenses/contribution margin ratio)		$1,277,463
	Fixed Manufacturing cost	$445,536
	Fixed Administrative cost	$339,976
	Total Fixed cost		$785,512
1	Break Even points in units		107,900 units
	(Total Fixed cost/Contribution margin per unit)
2	Margin of safety in units		81,000 units
	(Expected sales in units - Break Even point in units)
3	Margin of safety DOLLARS
	(Sales in $ - Nreak even points in $)		$959,113
4	If the company experience a price decrease next year with all other factors remaining same then it would
	increase the risk of the company as they need to produce more to break even and hence Marginn of safety will decrease