Question

Hello!

Can someone please explain how to solve this to me? I am stuck and I can't find this problem in my textbook,

thanks!

Margin of Safety Comer Company produces and sells strings of colorful indoor/outdoor lights for holiday display to retailers for $16.02 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 $835,434 per year. Administrative cost (all fixed) totals $576,438. Comer expects to sell 220,800 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

(1)

variable cost per unit = $1.87 + $1.70 + $0.57 + $0.42 = $4.56

total fixed costs = $835434 + $576438 = $1411872

Contribution margin per unit = sales price per unit - variable cost per unit

= $16.02 - $4.56 = $11.46

Break even point (unit sales) = total fixed costs/contribution margin per unit

= $1411872/$11.46

= 123200 units

(2)

margin of safety (in units) = total sales - break even sales

= 220800 - 123200 = 97600 units

(3)

margin of safety (in dollars) = total sales - break even sales

= (220800 x $16.02) - ($123200 x $16.02)

= $1563552

(4)

price decrease would increase risk for company. Because it would result in decrease in contribution margin per unit and therefore break even number would increase. Margin of safety would decrease due to increase in break even sales.