Question

chp 4 17) Margin of Safety

Comer Company produces and sells strings of colorful indoor/outdoor lights for holiday display to retailers for $11.98 per string. The variable costs per string are as follows:

Direct materials	$1.87
Direct labor	1.70
Variable factory overhead	0.57
Variable selling expense	0.42

Fixed manufacturing cost totals $483,784 per year. Administrative cost (all fixed) totals $373,226. Comer expects to sell 252,100 strings of light next year.

Required:

1. Calculate the break-even point in units.
units

2. Calculate the margin of safety in units.
units

3. Calculate the margin of safety in dollars.
$

4. Conceptual Connection: Suppose Comer actually experiences a price decrease next year while all other costs and the number of units sold remain the same. Would this increase or decrease risk for the company? (Hint: Consider what would happen to the number of break-even units and to the margin of safety.)

Answer 1

1
Sales		11.98
Direct material	1.87
Direct Labor	1.7
Variable Factory overhead	0.57
Variable selling expense	0.42
		4.56
Contribution per unit		7.42
Break Even point	Fixed cost / contribution per unit	115500
	857010/7.42
Fixed cost	483784+373226	857010
2
Total Contribution	252,100*7.42	1870582
Less:Fixed Cost		857010
Profit		1013572
P/v	4.56/11.98	0.38
Margin of Safety in Dollars	1013572/.38	2662849
Margin of Safety in Dollars	1013572/7.42	136600
3
The above situation would increase the risk of the company because they would need to produce more to break even and the margin of safety would decrease.