Question

Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month’s budget appear below:

 Required:

 1. What is the company's margin of safety? (Do not round intermediate calculations.)

 2. What is the company's margin of safety as a percentage of its sales? (Round your percentage answer to 2 decimal places (i.e. 1234 should be entered as 12.34).)

Answer 1

(1)-Company’s Margin of safety (in dollars)

Contribution Margin Ratio = [(Selling price per unit – Variable cost per unit) / Selling price per unit] x 100

= [($24.00 - $12.00) / $24.00] x 100

= [$12.00 / $24.00] x 100

= 50%

Break-Even Sales = Fixed Costs / Contribution margin ratio

= $10,440 / 0.50

= $20,880

Actual sales = Number of units sold x Selling price per unit

= 1,020 units x $24.00 per unit

= $24,480

Therefore, the Company’s Margin of safety (in dollars) = Total Actual sales – Break-even sales

= $24,480 - $20,880

= $3,600

“Hence, the Company’s Margin of safety (in dollars) will be $3,600”

(2)- Company’s Margin of safety Percentage

Company’s Margin of safety Percentage = [Margin of safety in Dollars / Actual sales] x 100

= [$3,600 / $24,480] x 100

= 14.71%

“Hence, the Company’s Margin of safety Percentage will be 14.71%”