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

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

= 15-10

= $5

Number of units sold = 14,000

Profit = $45,000

Profit = Sales - Total variable cost - Total fixed costs

45,000 = 14,000 x 15 - 14,000 x 10- Total fixed costs

45,000 = 210,000-140,000- Total fixed costs

Total fixed costs = $25,000

Break even point = Total fixed costs/ Contribution margin per unit

= 25,000/5

= 5,000

Margin of safety (in units) = Actual sales - Break even point

= 14,000-5,000

= 9,000

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