Question

Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month’s budget appear below:

Selling price per unit	$	23
Variable expense per unit	$	15
Fixed expense per month	$	6,800
Unit sales per month		1,000

Required:

1. What is the company’s margin of safety? (Do not round intermediate calculations.)

2. What is the company’s margin of safety as a percentage of its sales? (Round your percentage answer to 2 decimal places (i.e. .1234 should be entered as 12.34).)

Answer 1

1. Margin of safety

Margin of safety (dollars) = Profit / Contribution margin ratio

  Contribution margin ratio = Contribution margin per unit / Selling price per unit

= 8 / 23 = 34.78%

  Margin of safety (dollars) = $1,200 / 34.78%

=$3,450

2. Margin of safety ratio (%) = (Margin of safety / Actual sales) *100

= (3,450/ 23,000) * 100

= 15.00%

Explanation

Calculation of Profit
	$
Sales (23*1,000)	23,000.00
Less: Variable cost (15*1,000)	15,000.00
Contribution Margin	8,000.00
Less: Fixed cost	6,800.00
Profit	1,200.00