Zhao Co. has fixed costs of $286,200. Its single product sells for $163 per unit
QS 18-11 Margin of safety LO P2
Zhao Co. has fixed costs of $286,200. Its single product sells for $163 per unit, and variable costs are $110 per unit. If the company expects sales of 10,000 units, compute its margin of safety in dollars and as a percent of expected sales.
Homework Answers
Margin of safety in dollars = $ 749,800
Margin of safety in percent = 46%
Explanation
Break-even sales in units = Fixed cost / Contribution Margin per unit
= $286,200 / ($163 - $110)
= 5400 units
Break-even sales in dollar = Break-even sales units × selling price
= 5400 units x $163
= $880,200
Total sales = Expected sales × Selling cost
= 10,000 x $163
= $1,630,000
Margin of safety in dollars = Total sales - Break-even sales in dollar
= $1,630,000 - $880,200
= $ 749,800
Margin of safety in percent = [ Margin of safety in dollars / Total sales ] × 100
= ($ 749,800 / $1,630,000) x 100
= 46%
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