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 $ 29 Variable expense per unit $ 18 Fixed expense per month $ 8,800 Unit sales per month 950 Required: 1. What is the company’s margin of safety? (Do not round intermediate calculations.) 2. What is the company’s margin of safety as a percentage of its sales?

Instructions are below.

Explanation:

Giving the following information:

Selling price per unit $29

Variable expense per unit $18

Fixed expense per month $8,800

Unit sales per month 950

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

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

Break-even point in units= 8,800 / (29 - 18)

Break-even point in units= 800 units

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 8,800 / (11/29)

Break-even point (dollars)= $23,200

Now, the margin of safety in units and dollars:

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

Margin of safety (units)= 950 - 800

Margin of safety (units)= 150 units

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

Margin of safety (dollars)= (950*29 - 23,200)

Margin of safety (dollars)= $4,350

Finally, the margin of safety ratio:

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

Margin of safety ratio= 4,350/27,550

Margin of safety ratio= 0.16 = 16%

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