Question

Margin of Safety Comer Company produces and sells strings of colorful indoor/outdoor lights for holiday display to retailers for $11.76 per string. The variable costs per string are as follows: Direct materials $1.87 Direct labor 1.70 Variable factory overhead 0.57 Variable selling expense 0.42 Fixed manufacturing cost totals $540,000 per year. Administrative cost (all fixed) totals $385,200. Comer expects to sell 238,100 strings of light next year. Required: 1. Calculate the break-even point in units. units 2. Calculate the margin of safety in units. units 3. Calculate the margin of safety in dollars. 4. Conceptual Connection: Suppose Comer actually experiences a price decrease next year while all other costs and the number of units sold remain the same. Would this increase or decrease risk for the company? (Hint: Consider what would happen to the number of break-even units and to the margin of safety.) Increase ✓ Feedback Check My Work 1. Break-Even Units = Fixed Cost / Contribution Margin per Unit The margin of safety is the units sold or the revenue earned above the break-even volume. 2. Margin of Safety in Units = Sales in Units - Break-Even Units 3. Margin of Safety in Sales Revenue = Sales - Break-Even Sales Review the "How to Calculate the Break-Even Point in Units" and "How to Calculate the Margin of Safety" examples in your text.

Answer 1

Variable Cost per unit = Direct material + Direct labor + Variable factory overhead + Variable selling expense

= 1.87 + 1.70 + 0.57 + 0.42

= $4.56

Selling price per unit = $11.76

Total fixed cost = Fixed manufacturing cost + Administrative cost

= 540,000 + 385,200

= $925,200

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

= 11.76 - 4.56

= $7.2

1.

Break even units = Fixed cost/Contribution margin per unit

= 925,200/7.2

= 128,500

2.

Margin of safety in units = Sales in units - Break even units

= 238,100 - 128,500

= 109,600

3.

Sales = Number of units x Selling price per unit

= 238,100 x 11.76

= $2,800,056

Break even sales = Break even units x Selling price per unit

= 128,500 x 11.76

= $1,511,160

Margin of safety in sales revenue = Sales - Break even sales

= 2,800,056 - 1,511,160

= $1,288,896

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