Question

Parsley Corporation is a wholesaler that sells a single product and maintains a stable cost structure. Management has provided the
following data.
May June July

Selling price per unit 176 176 176
Sales units 4,000 7,000 6,000
Net operating income (Loss) 26,700 422,700
Gross margin 450,700 882,700
A. $ 1,056,000
B. $ 968,000
C. $ 668,400
D. $ 387,600
E. Zero
The best estimate of the margin of safety in July at the sales volume above is:

D) is the answer given, I just need the working to see how it is done. NO other information is given.

Answer 1

The detailed working is given below.

Estimated margin of safety for July
Sales Price per unit		176
Variable expenses:
Cost of goods sold per unit *		32
Operating expenses   per unit **		12
Total variable expenses   per unit		44
Contribution margin   per unit		132
Contribution margin   Ratio (132 / 176)		75%
Fixed expenses:
Cost of goods sold		125300
Operating Expenses		376000
Total Fixed expenses		501300
Break even sales   (Total fixed exp./CM ratio)		668400
Actual Sales   (6,000 X 176)		1056000
Margin of safety		387600

		May	June
Sales Units	A	4000	7000
Sales price	B	176	176
Sales Value (A X B)	C	704000	1232000
Gross Margin	D	450700	882700
Gross margin % (D / C) *	E	64.02%	71.65%
Cost of goods sold	F	253300	349300
As the gross margin % is different for the two months,
we can say that the cost of goods cosnsists of some
fixed part and some variable part.
First we calculate the variable part using the high-low
method.
		Units	Cost of
			Goods sold
High		7000	349300
Low		4000	253300
Difference		3000	96000
Per unit COGS (Variable part) *			32
		May	June
Total COGS	A	253300	349300
Variable protionof COGS (Volume X 32)	B	128000	224000
Fixed portion of COGS (A - B)	C	125300	125300
Similarly we work out for the operating expenses.
		May	June
Gross margin		450700	882700
Net operating income		26700	422700
Operating Expenses		424000	460000
		Units	Operating
			expenses
High	A	7000	460000
Low	B	4000	424000
Difference (A - B)	C	3000	36000
Per unit operating expense (Variable part) **	D		12.00
		May	June
Total operating expenses	A	424000	460000
Variable part of operatint expense ( Volume x 12)	B	48000	84000
Fixed portion of operating expense (A - B)	C	376000	376000