eBook Print Item Margin of Safety Comer Company produces and sells strings of co
ID: 2572564 • Letter: E
Question
eBook Print Item Margin of Safety Comer Company produces and sells strings of colorful indoor/outdoor lights for holiday display to retailers for $9.49 per string. The variable costs per string are as follows: Direct materials Direct labor Variable factory overhead Variable selling expense Fixed manufacturing cost totals $365,313 per year. Administrative cost (all fixed) totals $239,598. Comer expects to sell 223,200 strings of light next year. Required 1. Calculate the break-even point in units. $1.87 1.70 0.57 0.42 units 2. Calculate the margin of safety in units. units 3. Calculate the margin of safety in dollars. 4. Conceptual Connection: Suppose Comer actually experiences a price decrease next year while all other costs and the number of units sold remain the same. Would this increase or decrease risk for the company? (Hint: Consider what would happen to the number of break-even units and to the margin of safety.) Check My Work 3 more Check My Work uses remaining Previous NextExplanation / Answer
Selling price per string = 9.49
Variable cost per string = Direct materials + Direct labour + Variable factory overhead + Variable selling expense
= 1.87 + 1.7 + 0.57 + 0.42 = 4.56
Toatl fixed costs = Fixed manufacturing costs + Fixed administrative costs
= 365,313 + 239,598 = 604,911
Units sold = 223,200
Contribution margin per unit = Selling price per unit - Variable costs per unit
= 9.49 - 4.56 = 4.93
1. Break-even point in units = Fixed costs / Contribution margin per unit
= 604,911 / 4.93 = 122,700.
2. Margin of safety in units = Planned sales - Breakeven sales
= 223,200 - 122,700 = 100,500.
3. Margin of safety in dollars = Margin of safety in units * Selling price per unit
= 100,500 * 9.49 = 953,745.
4. If the company actually experience a price decrease next year while all other costs and the number of units remain the same, this would increase the risk for the company as the company would have to sell more units to breakeven and the Margin of safety for the company decreases.
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