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Fixed Costs are $50,000 and our product sells for $200 per unit. To produce each product...

Fixed Costs are $50,000 and our product sells for $200 per unit. To produce each product it takes $120 in variable costs. Current sales are 800 units. What is the Margin of Safety?

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Answer #1

Answer : Margin of Safety = $35,000 or 21.875 %

Explanation:

Contribution magin % = (Selling price per unit - Variable per unit) / Selling price per unit

= ($200 - $120) / $200 = 40 %.

Break even point ($) =  Fixed Costs / Contribution magin %

= $50,000 / 40 % = $125,000.

Current sales = 800 units * $200 = $160,000.

Margin of Safety = Current sales - Break even point ($)

= $160,000 - $125,000 = $35,000.

Margin of Safety % = Margin of Safety / Current sales

= $35,000 / $160,000

= 21.875 %.

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