Question

Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month’s budget appear below:

Selling price per unit	$	26
Variable expense per unit	$	18
Fixed expense per month	$	6,960
Unit sales per month		1,020

Required:

1. What is the company’s margin of safety? (Do not round intermediate calculations.)

2. What is the company’s margin of safety as a percentage of its sales? (Round your percentage answer to 2 decimal places (i.e. .1234 should be entered as 12.34).)

Answer 1

1	Margin of safety (in dollars)	$       3,900
2	Margin of safety percentage	14.71	%

Working:

Break-even sales (in dollars) = Fixed costs/Contribution margin ratio

Contribution margin ratio = (Selling price - Variable costs)/Selling price = ($26 - $18)/$26 = $8/$26

Break-even sales (in dollars) = $6960 x 26/8 = $22620

Budgeted sales (1020 x $26)	26520
Break-even sales	22620
Margin of safety (in dollars)	3900

Margin of safety percentage = Margin of safety (in dollars)/Budgeted sales = $3900/$26520 = 14.7059% rounded off to 14.71%