Question

Globus Autos sells a single product. 8,000 units were sold resulting in $83,000 of sales revenue, $21,000 of variable costs, and $20,000 of fixed costs. If variable costs decrease by $1.00 per unit, the new margin of safety is ________. (Round intermediate calculations to the nearest cent.)

Please explain each step and show formulas that are used.

Answer 1

Margin of safety = total sales - break even sales

First we calculate the contibution margin in order to calculate the break even sales.

Contribution margin per unit = sales per unit - variabke cost per unit

Contribution margin for the old costs is as follows:

	Total	Per unit
Sales unit	8,000
Sales revenue	$83,000	$10.38
Variable cost	$21,000	$2.63
Contribution margin	$62,000	$7.75

The contribution margin for new costs is:

	Per unit
Sales unit
Sales revenue	$10.38
Variable cost	$1.63
Contribution margin	$8.75

Break even sales = fixed costs / contribution margin per unit

= 20000 / 8.75

= 2287.02

Break even sales in dollars = 2287.02* 10.38

= $23,727.85

Margin of safety = 83000 - 23727.85

= $59,272.2