Question

Crackle Ltd sells one product, a giant firework, for £90. Each firework has variable costs of...

Crackle Ltd sells one product, a giant firework, for £90. Each firework has variable costs of £65. Fixed costs for the year are £25,000.

Crackle hopes to sell 2,500 units.

The margin of safety is: ????

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Answer #1

The margin of safety is a financial ratio that measures the amount of sales that exceed the break-even point. Margin of safety can be expressed in terms of value , units and percentage.

Calculation of Margin of Safety

Contribution per firework = Selling price - Variable cost = 90 - 65 = £ 25 per firework

Break even point in units (BEP) = Fixed cost/contribution per unit = 25000/25 = 1000 units

Break even point sales in £ = 1000 units x £90 = £90000

Actual sales value = 2500 units x £ 90 = £ 225000

Margin of Safety in £ = Actual sales - Break even sales = £225000 - £90000 =£135000

Margin of Safety in units = £135000/£90 =1500 units or 2500(sales)-1000(BEP) = 1500 units

Margin of safety in percentage = (Actual sales- break even point) / Actual sales = (2500-1000)/2500 = 60%

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