Question

ABC Company produces and sells four products. Information about these products for
2019, the most recent year, appears below:

                                              Product A Product B Product C Product D
selling price per unit 19.00 17.00 15.00 12.00
variable costs per unit 5.00 13.00 5.00 6.00
number of units sold 37,000 32,000 14,000 29,000

ABC Company had total fixed costs of $648,000 in 2019.

Calculate the margin of safety reported by ABC Company for 2019

Answer 1

$ 5,86,625 Working: a. Selling price Units sold Total Sales Weight Product A         19.00                  37,000 $       7,03,000           0.39 Product B         17.00                  32,000 $       5,44,000           0.30 Product C         15.00                  14,000 $       2,10,000           0.12 Product D         12.00                  29,000 $       3,48,000           0.19 Total $     18,05,000           1.00 b. Selling price(a) Variable expense(b) Contribution Margin(CM)(c=(a)-(b)) CM ratio (d=c/a) Weight(e) Weighted CM Ratio(d*e) Product A         19.00                      5.00                 14.00 73.68%           0.39 28.70% Product B         17.00                    13.00                    4.00 23.53%           0.30 7.09% Product C         15.00                      5.00                 10.00 66.67%           0.12 7.76% Product D         12.00                      6.00                    6.00 50.00%           0.19 9.64% Total 53.19% c. Break even sales in dollars = Fixed Expense/Weighted CM Ratio = $          6,48,000 / 53.19% = $       12,18,375 d. Margin of safety sales = Total Sales - Break even Sales = $       18,05,000 - $     12,18,375 = $          5,86,625