E. None of the above. Pierce Corporation is a wholesaler that sells a single pro

Question

E. None of the above. Pierce Corporation is a wholesaler that sells a single product and maintains a stable cost structure. However, the demand for their product fluctuates according to the season. Management has provided the following data for two months September October November Net operating income (Loss) Selling price per unit Sales units Gross margin (43,000) $ 65,000 $ 180 S 180 4,000 5,000 S 307,000 S 415,000 If the sales in November increases by 000 from October, the best estimate of the margin of safety in Novembers: A. S65,000 B. 125,000 C. S 108,333 D. 108,333 E. None of the above. 2 Page 2 of 11

Explanation / Answer

Unit contribution margin = Change in operating income/Change in sales units = (65000+43000)/(5000-4000) = $108 Total fixed costs = (5000*108)-65000= $475000 Unit sales to break even = Fixed costs/Unit contribution margin = 475000/108 = 4398.15 units Margin of safety in November = Actual sales-Break even sales = 5000-4398.15 = 601.85 units or 601.85*180= $108333

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