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	$	25
Variable expense per unit	$	12
Fixed expense per month	$	11,570
Unit sales per month		1,040

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

Answer:

1.)

Margin of safety = Current sales - Break even sales

Current sales = 1040 units * $25

= $26000

Break even point in units = Fixed cost / contribution margin per unit

Contribution margin per unit = Selling price - variable expenses

= $25 - $12

= $13

Break even point in units = $11570/ $13

= 890 units

Break even point in sales dollar = 890 units * $25

= $22250

Margin of safety = $26000- $22250

= $3750

2.)

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

= $25 - $12

= $13

Break-even units = Fixed expense / Contribution margin per unit

= $11570/ $13 = 890

Margin of safety = Sales - Break even sales

= 1040 - 890

= 150

Margin of safety as a percentage of sales = Maragin of safety / Sales * 100

= 150 / 1040 * 100

= 14.42%