Question

Globus Autos sells a single product. 8500 units were sold resulting in $81,000 of sales revenue, $25,000 of variable costs, and $16,000 of fixed costs. If variable costs decrease by $1.20 per unit, the new margin of safety is ________. (Round intermediate calculations to the nearest cent.)

$61,488

$25,000

$81,000

$65,000

Answer 1

Solution :

As per the information given in the question we have

Number of units sold = 8,500 ;   Sales revenue = $ 81,000   ; Variable costs = $ 25,000   ;

Thus the selling price per unit = Sales Revenue / Number of units sold

= $ 81,000 / 8,500 = $ 9.529412

= $ 9.53 ( when rounded off to the nearest cent )

Thus the variable cost per unit = Variable costs / Number of units sold

= $ 25,000 / 8,500 = $ 2.941176

= $ 2.94 ( when rounded off to the nearest cent )

Breakeven point in sales after decrease in variable cost :

The formula for calculating the Break even point in sales

= Fixed costs/ Contribution margin ratio

The contribution margin ratio is = ( Selling price per unit – Variable cost per unit ) / Selling price per unit

As per the information given in the question we have

Fixed costs = $ 16,000 ; Selling price per unit = $ 9.53   ;

Existing variable cost = $ 2.94 ; Decrease in existing Variable cost = $ 1.20 ;

New variable cost = Existing variable cost - Decrease in existing Variable cost

= $ 2.94 - $ 1.20 = $ 1.74

Thus the new contribution margin ratio is = ( $ 9.53 - $ 1.74 ) / $ 9.53 = $ 7.79 / $ 9.53 = 0.817284

= 0.82

Applying the available in the formula for break even point in sales

= $ 16,000 / 0.82

= $ 19,512.1951

= $ 19,512.20

Thus the Breakeven point in sales after decrease in variable cost is = $ 19,512.20

Calculation of margin of safety :

The formula for calculating the Margin of safety is

Margin of safety = ( Current sales – Break even point in sales after decrease in variable cost )

As per the information available we have

Current sales = $ 81,000 ;   Break even point in sales after decrease in variable costs= $ 19,512.20

Applying the above information in the formula we have margin of safety as

= $ 81,000 - $ 19,512.20

= $ 61,487.80

= $ 61,488

Thus the new margin of safety = $ 61,488

The solution is option 1 = $ 61,488