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.

Question

Business

Jovanny Farrell

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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Answers (1)

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Neveah Duffy · Answer 1

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%