Molander corporation is a distributor of a sun umbrella used at resort hotels. data concerning the next month’s budget appear below: selling price per unit $ 30 variable expense per unit $ 20 fixed expense per month $ 7,500 unit sales per month 1,000 required: 1. what is the company’s margin of safety? 2. what is the company’s margin of safety as a percentage of its sales?

1. $7,502

2. 25%

Explanation:

For computing the margin of safety, first we have to find out the break even sales which is shown below:

Break-even point = (Fixed expenses) ÷ (Profit volume Ratio)

where,  

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

= $30 - $20

= $10

And, Profit volume ratio = (Contribution margin per unit) ÷ (selling price per unit) × 100

So, the Profit volume ratio = (10) ÷ (30) × 100 = 33.33%

And, the fixed expenses is $7,500

Now put these values to the above formula  

So, the value would equal to

= (7,500) ÷ (33.33%)

= $22,502

1. Now the margin of safety equals to

= Expected sales - break-even sales

where,

Expected sales = Selling price per unit × Unit sales per month

                         = $30 × 1,000 units

                          = $30,000

And, the break-even sales is $15,000

Now put these values to the above formula  

So, the value would equal to

= $22,502 - $15,000

= $7,502

2. And, the margin of safety to sales percentage equals to

= (Margin of safety ÷ expected sales) × 100

= ($7,502 ÷ 30,000) × 100

= 25%

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