Question

During May, XYZ Company sold 9,000 units and reported the following income
statement:

Sales ............................  $540,000
Variable costs ...................   216,000
Fixed costs ......................   117,000
Net income .......................  $207,000

Calculate the margin of safety reported by XYZ Company for May.

Answer 1

Number of units sold = 9,000
Sales = $540,000
Variable Costs = $216,000
Fixed Costs = $117,000

Selling Price per unit = Sales / Number of units sold
Selling Price per unit = $540,000 / 9,000
Selling Price per unit = $60

Variable Cost per unit = Variable Costs / Number of units sold
Variable Cost per unit = $216,000 / 9,000
Variable Cost per unit = $24

Contribution Margin Ratio = (Selling Price per unit - Variable Cost per unit) / Selling Price per unit
Contribution Margin Ratio = ($60 - $24) / $60
Contribution Margin Ratio = 0.60

Break-even Point in dollars = Fixed Costs / Contribution Margin Ratio
Break-even Point in dollars = $117,000 / 0.60
Break-even Point in dollars = $195,000

Margin of Safety = Sales - Break-even Point in dollars
Margin of Safety = $540,000 - $195,000
Margin of Safety = $345,000

Margin of safety reported by XYZ Company for May is $345,000