Question

Fountain Corp. has a selling price of $15 per unit and variable costs of $10 per unit. When 14,000 units are sold, profits equaled $45,000. What is the Margin of Safety?

Answer 1

Selling price per unit = $15

Variable cost per unit = $10

Number of unit sold = 14,000

Profit = $45,000

Margin of safety = ?

Contribution margin per unit = Selling price per unit - Variable cost per unit

= 15 - 10

= $5

Contribution margin ratio = Contribution margin per unit/Selling price per unit

= 5/15

= 33.3333333333%

Profit = (Sales x Contribution margin ratio) - Fixed cost

45,000 = (14,000 x 15) x 33.3333333333% - Fixed cost

45,000 = 70,000 - Fixed cost

fixed cost = $25,000

Break even sales = Fixed cost/Contribution margin ratio

= 25,000/33.3333333333%

= $75,000

Margin of safety = Actual sales - Break even sales

= (14,000 x 15) - 75,000

= 210,000 - 75,000

= $135,000