Question

The New Age Pet Store sells Diva Doggie pet waste disposal systems for $60 each. The systems include the unit and a one-year supply of enzyme digester waste terminator. The cost of the unit and enzyme is $43.20. The only other costs are fixed costs of $2,856. During the current period, New Age sold 580 of the units through the store’s new on-line catalog division.

What is the margin of safety in units? In dollars?

Margin of safety in units

Margin of safety in dollars$

Answer 1

Margin of Safety in Dollars = Net operating Profit / Contribution margin ratio

= $6888 / 28%

= $24600.

Margin of safety in units = Margin of safety / sale price per unit

= $24600 / $60

= 410 units.

Workings:

Net operating Profit :

Sale Revenue = 580 x $60 = $34,800

Less: Variable cost = 580 x $43.20 = $25,056

Contribution margin = $9,744

Less: Fixed cost = $2856

Net operating Income = $6,888

Contribution margin ratio:

Contribution margin ratio = (Contribution margin / Net sale) x 100

= (+9744 / $34,800) x 100 = 28%