Molander Corporation is a distributor of a sun umbrella used at resort hotels. D

Question

Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month’s budget appear below:

Compute the company’s margin of safety. (Do not round intermediate calculations.)

Compute the company’s margin of safety as a percentage of its sales. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

  Selling price $25 per unit   Variable expenses $13 per unit   Fixed expenses $10,200 per month   Unit sales 1,000 units per month

Explanation / Answer

The excess of actual or budgeted sales over the break even volume of sales is called margin of safety. At breakeven point costs are equal to sales revenue and profit is zero. Margin of safety, therefore, tells us the amount of sales that can be dropped before losses begin to be incurred.

Margin of safety = Total budgeted or actual sales - Breakeven point sales

First we need to calculate breakeven point

Break-even point is the level of sales that a company must achieve to reach at no profit no loss situation,

The formula to calculate BEP (in units) = Total Fixed cost/(selling price per unit - variable cost per unit)

Where,

Fixed cost = $10200

Selling price = 25 per unit

Variable cost = 13 per unit

Let's put all the values in the formula to get the BEP in units,

BEP = 10200/ (25 - 13)

BEP = 10200/12

BEP = 850 Units

Budgeted/ actual sales = 1000 units

BEP in units = 850 units

Then margin of safety will be

MoS = 1000 - 850

           = 150 Units

% of margin of safety as % of total sales = 150/1000 = .15 or 15%

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