Calculate the margin of safety (in total sales dollars) based on last year’s dat

Question

Calculate the margin of safety (in total sales dollars) based on last year’s data

Calculate the weighted average contribution margin per unit based on last year’s data

Tandem Company produces and tab two models of a product: economy and deluxe The economy modal is a standard product that e produced in large belches aid kept in stock to be sold to a few large discount chains. The deluxe model is produced in smaller bathes based on customer specifications and is distributed through smaller, high - end retail stores. Production and sales bat year were as follows: Lest years income statement (displayed in a variable coating format) is shown below:

Explanation / Answer

Margin of safety (MOS) is the excess of budgeted or actual sales over the break even volume of sales. It stats the amount by which sales can drop before losses begin to be incurred. The higher the margin of safety, the lower the risk of not breaking even. Margin of Safety = (expected sales - breakeven sales) Expected sales = $640,000 Lets assume that for every 1.5 Economy units, 1 Dlx units are sold (6000:4000 ie 3:2 ratio). So we can say that:- Cont Margin of 1.5 units of Economy = 1.5*$12 = $18 +COnt Margin of 1 Units of Dlx = 1*$40 = $40 ---------------------------------------------------------- SO 1 Equivalent Unit COnt margin = $58 The break even sales have been calculated as follows: Sales = Variable expenses + Fixed expenses + Profit So BE Sales -Var exp = Fixed exp ie $58 *Eq Unit = Fixed exp ie Equivalent Units = Fixed exp/$58 = $181,250/$58 = 3125 units SO To recover $240,000 of fixed cost, at $58 of contribution per "unit," would require selling 3125 "units" ($240,000/$58). To be clear, this translates into 3125 Dlx and 3125*1.5=4687.5 Eco units. Total break-even sales would be (($40 X4687.5 Eco) + ($100 X 3125 Dlx)) = $500,000. So Margin of Safety = $640,000-$500,000 = $140,000 Weighted average contribution margin: Cont Margin Ratio (CMR) for Eco product = Cont pu/Sale price pu = $12/$40 = 30% CMR for DLX = 40/100 = 40% To calculate the weighted average contribution margin you need to weight the contribution margin per unit of these two products and present it as "two-in-one": Weighted Average Contribution Margin per Unit = 30%* COnt pu of eco + 40%*Cont pu of Dlx = 30%*$12 + 40%*$40 = $3.60+$16.00 = $19.60

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