Donald's Tables Co. makes a standard coffee table. Donald's has determined the sales and cost values...

Donald's Tables Co. makes a standard coffee table. Donald's has determined the sales and cost values for the month of March that are given below. Find the margin of safety in dollars.

Selling Price of a coffee table: $9.30
Variable cost per coffee table: $1.80
Sales Commission (as a percentage of revenues) to be paid by Donald's to its sales people: 0%
Fixed cost: $24,000
Tax rate (as a percentage of operating income): 25%
Net Income: $11,250

Expert Solution

	Margin of safety	=	$ 18,600

1	Workings:
(i)	Unit selling Price	=	$ 9.30
Less:	Unit variable cost	=	$ 1.80
(ii)	Unit contribution margin	=	$ 7.50
(ii) / (i)	Contribution margin ratio	=	80.65%

	Net Income	=	$ 11,250
Add:	Tax [($11250 / 75%) X 25%]	=	$ 3,750
	Opearting Income before tax	=	$ 15,000
Add:	Fixed costs	=	$ 24,000
(i)	Contribution margin	=	$ 39,000
(ii)	Contribution margin ratio	=	80.65%
(i) / (ii)	Total Sales Revenue	=	$ 48,360

	Break-even point in dollars	=	Fixed costs /Contribution margin ratio
		=	$24000 / 80.65%
		=	$ 29,760

	Margin of safety	=	Current dollar sales - Break - even point in dollar sales
		=	$48360 - $29760
		=	$ 18,600

ekkarill92 answered 3 years ago

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