Question

A company manufactures and sells two types of gloves – Warm and Cozy – for runners. Current financial data is provided below: WARM COZY Selling Price per pair $8.00 $12.00 VC per pair $2.00 $ 6.00 Number of pairs sold per month 600 200 Fixed costs = $2,250 per month

a) Comparing the original information provided and your break-even calculation, what is the Margin of Safety in dollars between them?

b) Comparing the original information provided and your break-even calculation, what is the Margin of Safety in percentage between them? (enter your response to two decimals, for example .15 for fifteen percent)

Answer 1

Answer (a)

	Warm	Cozy
Selling Price per pair	$8.00	$12.00
Variable cost per pair	$2.00	$6.00
Contribution per pair	$6.00	$6.00
Contribution margin	75%	50%

Breakeven point in units = (Fixed cost / Contribution margin per unit)

Warm

Breakeven point in Units = $2,250 / $6.00

                                            = 375 units

Cozy

Breakeven point in Units = $2,250 / $6.00

                                            = 375 units

       

Breakeven point in sales = (Fixed cost / Contribution margin)

Warm

Breakeven point in sales = ($2,250 / 75) * 100

                                            = $3,000

Cozy

Breakeven point in sales = ($2,250 / 50) * 100

                                            = $4,500

Margin of safety in dollars = Current sales – Breakeven sales

Warm

Current sales = 600 units * $8

                         = $4,800

Margin of safety in dollars = $4,800 - $3,000

                                                = $1,800

Cozy

Current sales = 200 units * $12

                         = $2,400

Margin of safety in dollars = $2,400 - $4,500

                                                = -$2,100

                                 

Answer (b)

Margin of safety in Percentage = [(Current sales – breakeven point) / Current sales] * 100

Warm

Margin of safety in Percentage = [($4,800 - $3,000) / $4,800] * 100

                                                        = 37.5% or 0.375      

Cozy

Margin of safety in Percentage = [($2,400 - $4,500) / $2,400] * 100

                                                        = -87.5% or -0.875