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13 November, 15:33

Zhao Co. has fixed costs of $330,600. Its single product sells for $171 per unit, and variable costs are $114 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.

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  1. 13 November, 18:51
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    Margin of safety in dollars = $718,200

    Margin of safety in percent = 42%

    Explanation:

    Data provided in the question:

    Fixed costs = $330,600

    Selling cost = $171 per unit

    Variable cost = $114 per unit

    Expected sales = 10,000

    Now,

    Break-even sales = [ Fixed cost ] : [ Selling price - Variable cost ]

    = $330,600 : [ $171 - $114 ]

    = 5,800 units

    Thus,

    Break-even sales in dollar = Break-even sales units * selling price

    = 5,800 units * $171

    = $991,800

    Total sales = Expected sales * Selling cost

    = 10,000 * $171

    = $1,710,000

    Margin of safety in dollars = Total sales - Break-even sales in dollar

    = $1,710,000 - $991,800

    = $718,200

    Margin of safety in percent

    = [ Margin of safety in dollars : Total sales ] * 100%

    = [ $718,200 : $1,710,000 ] * 100%

    = 42%
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