Question

Delectable Foods produces a gourmet condiment that sells for $ 22 per unit. Variable cost is $ 10 per​ unit, and fixed costs are $ 6 comma 000 per month. If Delectable expects to sell 1 comma 500 ​units, compute the margin of safety in dollars.​ (Round any intermediate calculations to the nearest whole​ unit, and your final answer to the nearest​ dollar.)

Answer 1

$22,000

Step-by-step explanation:

Contribution Margin per unit = sales price per unit - variable cost per unit

= $22 – $10

= $12

Contribution margin ratio:

= (Contribution Margin per unit ÷ sales price per unit) × 100

= (12 ÷ 22) × 100

= 54.54%

Total sales = Sales price x No of units sold

= $22 x 1,500 units

= 33,000

Break-even sales:

= Fixed Cost ÷ Contribution margin ratio

= 6,000 ÷ 54.54%

= $11,000 (approx)

Margin of Safety in units:

= (Total sales - Break even sales) ÷ selling price per unit

= (33,000 – 11,000) ÷ 22

= 1,000 units

Alternatively ,

Break-even sales in units:

= Fixed cost ÷ Contribution margin per unit

= 6,000 ÷ 12

= 500 units

Margin of safety in units:

= Total sales in units - Break even sales in units

= 1,500 - 500

= 1,000 units

Margin of safety in dollars:

= margin of safety in units × Selling price per unit

= 1,000 units × $22

= $22,000