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Clyde’s Pastry Co. sells pastries for $5, and incurs variable costs of $1 per pastry. Clyde’s...

Clyde’s Pastry Co. sells pastries for $5, and incurs variable costs of $1 per pastry. Clyde’s total fixed costs are $10,000 per year. By what amount will Clyde’s margin of safety decrease if Clyde sells 2,700 rather than 3,000 pastries during the year?

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Answer #1

Selling Price per pastry = $5

Variable cost per pastry = $1

Total Fixed cost per year = $10,000

Contribution margin per pastry = Sales - Variable cost = $5-$1= $4

Break even in terms of pastry units = Fixed cost/Contribution margin = $10,000/$4 = 2500 units

Break even Sales in $ = $5 x break even units = $5 x 2500 = $12,500

  1. Margin of safety for sale of 2700 units = Normal Sales - Breakeven sales = $5 x 2700 - $12,500 = $13,500 -$12,500 = $1,000
  2. Margin of safety for sale of 3,000 units = Normal Sales - Breakeven sales = $5 x 3000 - $12,500 = $15,000 -$12,500 = $2,500

Therefore, decrease in margin of safety if Clyde sells 2,700 rather than 3,000 pastries during the year = $2,500-$1,000 = $1,500

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