Question

A company’s contribution format income statement for last month is given below:

Sales (40,000 units × $22 per unit)	$	880,000
Variable expenses		616,000
Contribution margin		264,000
Fixed expenses		211,200
Net operating income	$	52,800

The company considers renovating its operations by purchasing a new machine that would reduce variable expenses by $6.60 per unit. However, fixed expenses would increase to a total of $475,200 each month. Using the new machine would not cause a change in monthly sales quantity or price per unit. What would the company's margin of safety in dollars be if it purchases and uses the new machine?

Answer 1

New income statement:

	Income statement
Ref	Particulars	Per unit	Total
	Units		40,000
a	Sales revenue	22.00	$          880,000
	Minus:
b	Variable cost	8.40	$          336,000
c= a-b	Contribution	13.60	$          544,000
	Minus:
d	Fixed cost		$          475,200
e= c-d	Net income		$            68,800

	Contribution margin ratio
Ref	Particulars	Amount
a	Sales revenue	$              22.00
b	Contribution	$              13.60
c=b/a *100	Contribution margin ratio	61.82%

Margin of safety = 68800/61.82% = 111291

Answer is:

111291

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