Problem: Letterman Office Service & Supply (LOSS) sells a variety of office equi

Question

Problem: Letterman Office Service & Supply (LOSS) sells a variety of office equipment including the Executive office chair. The Executive sells for $200. Expected sales for next year are 5,000 units (sales estimates made by management are usually within 250 units). LOSS is considering a change in its manufacturing process. The accountants and engineers have developed the following two cost structures: Current Manufacturing System: $140 variable cost per unit and $180,000 in fixed costs. Alternate Manufacturing System: $40 variable cost per unit and $640,000 in fixed costs What are the margins of safety of the two plans in units and percentage?

Explanation / Answer

Margin of safety = actual sales - breakeven sales Breakeven sales for case 1 = 180000/(200-140) = 3000 Breakeven sales for case 2 = 640000/(200-40) = 4000 Margin of safety Case 1 = 5000-3000 = 2000units case 2 = 5000-4000 = 1000units in percentage case 1= 2000/5000 = 40% case 2 = 1000/5000 = 20%

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