The following monthly data are available for Seasons Company which produces only one product: Selling price per unit, $42; Unit variable expenses, $14; Total fixed expenses, $42,000; Actual sales for the month of June, 4,000 units. How much is the total margin of safety in dollars for June

Margin of safety= 105,313.43

Explanation:

Giving the following information:

Selling price per unit= $42

Unit variable expenses= $14

Total fixed expenses= $42,000

Actual sales for June= 4,000 units.

First, we need to calculate the break-even point in dollars:

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 42,000 / [(42 - 14)/42]

Break-even point (dollars)= 42,000/ 0.67

Break-even point (dollars)= $62,686.57

Now, we can determine the margin of safety in dollars:

Margin of safety= (current sales level - break-even point)

Margin of safety= (4,000*42) - 62,686.57

Margin of safety= 168,000 - 62,686.57

Margin of safety= 105,313.43

$105,000

Explanation:

Margin of safety is the value of profit after deducting variable and fixed expenses from sales.

To calculate margin of safety we need contribution margin ratio.

Contribution margin = Sales - Variable costs

Contribution margin = $42 - $14 = $28

Break even sales = fixed expenses / Contribution Margin

Break even sales = $42,000 / $28 = 1,500 units

Actual Sales = 4,000 units

Margin of safety in units = 4,000 units - 1,500 units = 2,500 units

Margin of safety in dollars = 2,500 units x $42 = $105,000

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