Gibson Company makes a product that sells for $33 per unit. The company pays $24 per unit for the variable costs of the product and incurs annual fixed costs of $84,600. Gibson expects to sell 21,600 units of product. Required Determine Gibson’s margin of safety expressed as a percentage.

Margin of safety ratio= 0.5648= 56.48%

Explanation:

Giving the following information:

Selling price= $33

Unitary variable cost= $24

Fixed costs= $84,600

Units sold= 21,600

First, we need to calculate the break-even point in units:

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 84,600 / (33 - 24)

Break-even point in units= 9,400 units

Now, the margin of safety:

Margin of safety ratio= (current sales level - break-even point)/current sales level

Margin of safety ratio= (21,600 - 9,400)/21,600

Margin of safety ratio= 0.5648= 56.48%

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