Question

Wildhorse Co. sells pre-fabricated modular tiny houses. Last year, the company sold 75 units at $45000 each. The variable cost per tiny house was $29000. Fixed costs totaled $800000. The company’s margin of safety ratio was

0.36

0.33

1.67

0.64

Answer 1

Number of units sold = 75

Selling price per unit = $45,000

Variable cost per unit = $29,000

Fixed cost = $800,000

Contribution margin per unit = Sales - Variable cost

= 45,000-29,000

= $16,000

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

= 16,000/45,000

= 35.5555556%

Break even sales in dollars = Fixed costs/Contribution margin ratio

= 800,000/35.5555556%

= $2,250,000

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

= 75 x 45,000

= $3,375,000

Margin of safety = Actual sales- Break even sales in dollars

= 3,375,000-2,250,000

= $1,125,000

Margin of safety ratio = Margin of safety/Actual sales

= 1,125,000/3,375,000

= 0.33

The company’s margin of safety ratio was = 0.33

Second option is correct.