Garfield Corporation is considering building a new plant in Canada. It predicts
ID: 2403744 • Letter: G
Question
Garfield Corporation is considering building a new plant in Canada. It predicts sales at the new plant to be 60 comma 000 units at $ 7?/unit. Below is a listing of estimated? expenses: Category Total Annual Expenses ?% of Annual Expense that are Fixed Materials $ 70 comma 000 30?% Labor $ 30 comma 000 20?% Overhead $ 80 comma 000 30?% ?Marketing/Admin $ 50 comma 000 40?% A Canadian firm was contracted to sell the product and will receive a commission of 20?% of the sales price. No U.S. home office expenses will be allocated to the new facility. The margin of safety percentage for Duncan Enterprises is? (Round any intermediary percentage calculations to the nearest whole? percent.)
Explanation / Answer
Margin of safety = (Actual sales - Break even point )÷Actual Sales
Break even point= Total fixed cost÷(Price per unit-variable cost per unit)
Fixed expenses of commission = 20% of sales value
Fixed expenses of commission =20% of 60000×7=420000×20%=84000
Variable expenses=Material + labour+overhead+ marketing/admin
VC=70%of70000÷60000+80%of 30000÷60000+70%of 80000÷60000+ 60%of50000÷60000
VC=0.82+0.4+0.93+0.5
VC=2.65
Fixed cost =21000 of material+6000 of labour+24000 of overhead+20000 of marketing
Fixed cost = 71000
Total fixed cost=71000+84000=155000
Break even point=155000÷(7-2.65)=155000÷4.35=35632 units
Margin of safety =( 60000-35632)/60000=24368/60000
=40.61%
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