Question

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.59 and the average variable expense per cup is $0.56. The average fixed expense per month is $1,450. Current sales are $3,498. What is the margin of safety expressed in Sales Dollars? Also, calculate the margin of safety as a percentage of current sales. (Hint: first calculate the break-even point in sales dollars, then calculate margin of safety in $). Round to the nearest dollar.

Margin of Safety in Dollars          

"$1,000"

"$3,498"

"$1,260"

"$2,238"

Margin of Safety as a % of Current Sales

"36%"

"64%"

"12%"

"58%"

Answer 1

Sale Price per cup = $1.59

Variable Cost per cup = $0.56

Contribution per cup = Sales - Variable Cost = $1.59 - $0.56 = $1.03

Fixed Cost per month = $1,450

Break-even units = Fixed Costs / Contribution per unit = $1,450 / $1.03 = 1408 cups (Approx.)

Break-even Sales = 1408 * Sale Price per cup = 1408 * $1.59 = $2,238.72

Margin of Safety in Dollars is = The Current Sales Level - Breakeven Sales = $3,498 - $2,238.72 = $1,260 (Approx.)

Hence, correct option is Option C "$1,260"

Margin of Safety as a % of Current Sales = $1,260 / $3,498 *100 = 36%

Hence, correct option is Option A "36%"

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