Question

Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month's budget appear below. 

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 (ie. .1234 should be entered as 12.34).) 

Answer 1

1	Margin of safety (in dollars)	$       3,750
2	Margin of safety percentage	15.00	%

Working:

Break-even sales (in dollars) = Fixed costs/Contribution margin ratio

Contribution margin ratio = (Selling price - Variable costs)/Selling price = ($25 - $14)/$25 = $11/$25 = 44%

Break-even sales (in dollars) = $9350/44% = $21250

Actual sales (1000 x $25)	25000
Break-even sales	21250
Margin of safety (in dollars)	3750

Margin of safety percentage = Margin of safety (in dollars)/Actual sales = $3750/$25000 = 15%