Question

1. Knight Company sells a single product that has a variable cost per unit of $39 and a contribution margin ration of 40%. The total fixed costs associated with this product are $841,100. Major expects to sell 41,700 units this year. What is the margin of safety in dollars?

Answer 1

variable cost per unit = $39

contribution margin ratio = 40%.

Fixed costs = $841,100.

Major expects to sell 41,700 units this year.

margin of safety in dollars = ?

Since contribution margin ratio is 40%, variable cost must be 60% of selling price.

variable cost per unit = Selling price x 60/100

39 = Selling price x 60/100

Selling price = 39 x 100/60

= $65

Break even point in sales dollars = Fixed cost/Contribution margin ratio

= 841,100/40%

= $2,102,750

Actual sales = Number of units to be sold x Selling price per unit

= 41,700 x 65

= $2,710,500

Margin of safety = Actual sales - Break even sales

= 2,710,500 - 2,102,750

= $607,750

Hence, margin of safety in dollars = $607,750