A company’s contribution format income statement for last month
is given below:
| Sales (40,000 units × $21 per unit) | $ | 840,000 | |
| Variable expenses | 588,000 | ||
| Contribution margin | 252,000 | ||
| Fixed expenses | 201,600 | ||
| Net operating income | $ | 50,400 | |
The company considers renovating its operations by purchasing a new machine that would reduce variable expenses by $6.30 per unit. However, fixed expenses would increase to a total of $453,600 each month. Using the new machine would not cause a change in monthly sales quantity or price per unit. What would the company's margin of safety in dollars be if it purchases and uses the new machine?
| Total | per unit | |
| Sales (40,000 units x $21 per unit) | $ 840,000 | $ 21.00 |
| Variable expenses | $ 336,000 | $ 8.40 |
| Contribution margin | $ 504,000 | $ 12.60 |
| Fixed expenses | $ 453,600 | |
| Net operating income | $ 50,400 |
| Old variable expense per unit = $588,000/40,000 units = $14.7 per unit |
| New variable expense per unit = $14.7 - $6.30 = $8.40 per unit |
| Break even in sales units = Fixed cost/ Contribution margin per unit |
| Break even in sales units = $453,600 / $12.60 = 36,000 units |
| Margin of safety in units = 40,000 - 36,000 = 4,000 units |
| Margin of safety in dollars = 4,000 units x $21 per unit = $84,000 |
| Answer: $84,000 |
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