Question

Data concerning next month's budget for XYZ Company appear below: Selling price $24 per unit Variable expenses $15 per unit Fixed expenses $7,380 per month Unit sales 970 units per month Required: 1. Compute the company's margin of safety in dollars, units and as a percentage of sales. You must compute all three and will have three different numbers. Be sure to indicate which is which 2. In your own words, explain what the margin of safety is. What does this mean for the company? YOU MUST SHOW YOUR WORK TO EARN CREDIT! HTML Edition

Answer 1

Part 1

Contribution per unit = selling price per unit - variable cost per unit

= 24-15 = 9 per unit

Break even point (units) = fixed cost/contribution per unit

= 7,380/9

= 820 units

Margin of safety sales (units) = actual sales - break even sales

= 970 - 820

= 150 units

Margin of safety sales ($) = 150 * 24 = $ 3,600

Margin of safety sales (%) = (margin of safety sales/ actual sales)*100

= (150/970)*100

= 15.46%

Part 2

Margin of safety sales means the extra sales which company makes more than and its break even point. It acts like a buffer which means that after this number of units the company won't be e facing any loss.

This is generally used by the company to evaluate any operation or any of the department or product. If at all a company things to stop any of its department or product it will use margin of safety sales method to get idea whether it is profitable to shutdown the department or product or not.