Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of rela

Question

Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of relaunching the Western Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would be sold for $14,000 and at that price, Thad estimates 600 units would be sold each year. The variable cost to produce and sell the cycles would be $9,800 per unit. The annual fixed cost would be $1,890,000.

What is the margin of safety in dollars (Omit the "$" sign in your response.)

Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of relaunching the Western Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would be sold for $14,000 and at that price, Thad estimates 600 units would be sold each year. The variable cost to produce and sell the cycles would be $9,800 per unit. The annual fixed cost would be $1,890,000.

Explanation / Answer

(A)...For Break-even unit sales, net income should be zero.

i.e

sales - variable expense - fixed expense = net income = 0

Let N = number of units to be sold at break-even.

then

$14,000xN - $9,800xN - $18,90,000 = 0

=> N = 450

Break-even in unit sales = 450 units

(B).. margin of safety = estimated unit sales - break-even unit sales

= 600 - 450

= 150 units

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