Otto Company makes a product that sells for $5 per unit. The company pays $3 per

Question

Otto Company makes a product that sells for $5 per unit. The company pays $3 per unit for the variable costs of the product and incurs fixed costs of $50,000. Otto expects to sell 30,000 units of product.

Determine Otto’s margin of safety in units, sales dollars, and as a percentage. (Round "Percentage" answer to 1 decimal place. (i.e., .234 should be entered as 23.4).)

Units Sales Percentage

Otto's Margin of Safety

Otto Company makes a product that sells for $5 per unit. The company pays $3 per unit for the variable costs of the product and incurs fixed costs of $50,000. Otto expects to sell 30,000 units of product.

Required

Determine Otto’s margin of safety in units, sales dollars, and as a percentage. (Round "Percentage" answer to 1 decimal place. (i.e., .234 should be entered as 23.4).)

Units Sales Percentage

Otto's Margin of Safety

Explanation / Answer

Margin of safety in units=5000 units

Margin of safety in sales dollars=$25000,

Margin of safety as a percentage=16.7%

working-

Particulars Amount Selling price 5 Variable cost 3 Contribution(selling price-variable cost) per unit 2 P/v ratio 0.4 Fixed cost 50000 Break even sales in unit( fixed cost/contribution per unit) 25000 Budgeted sales units 30000 Margin of safety in units(( Budgeted sales units- Break even sales units) (30000-25000) Margin of safety in units(( Budgeted sales units- Break even sales units) 5000 units Margin of safety in %(( Budgeted sales units- Break even sales units)/ Budgeted sales units (30000-25000)/30000 Margin of safety in %(( Budgeted sales units- Break even sales units)/ Budgeted sales units 16.7% Break even point in dollars( BEP in units * sales price per unit) 25000*5 Break even point in dollars( BEP in units * sales price per unit) 125000 Budgeted sales in dollars( Budgeted sales unit * sales price per unit 30000*5 Budgeted sales in dollars( Budgeted sales unit * sales price per unit 150000 Margin of safety in dollars(( Budgeted sales in dollars- Break even sales in dollars) 150000-125000 Margin of safety in dollars(( Budgeted sales in dollars- Break even sales in dollars) 25000

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