Ideal Company Ideal Company produces and sells a single product. Information on its costs follow:
Refer to Ideal Company. In the upcoming year, Ideal Company estimates that it will produce and sell 4,000 units. The variable costs per unit and the total fixed costs are expected to be the same as in the current year. However, it anticipates a sales price of $16 per unit. What is Ideal Company's projected margin of safety for the coming year?

Question

Ideal Company Ideal Company produces and sells a single product. Information on its costs follow:
 Refer to Ideal Company. In the upcoming year, Ideal Company estimates that it will produce and sell 4,000 units. The variable costs per unit and the total fixed costs are expected to be the same as in the current year. However, it anticipates a sales price of $16 per unit. What is Ideal Company's projected margin of safety for the coming year?

Quizplus · Accepted Answer

Margin of Safety = (Expected Sales - Break-even Sales) / Expected Sales

Expected Sales = 4,000 units x $16 per unit = $64,000

Break-even Sales = Total Fixed Costs / Contribution Margin per unit

Contribution Margin per unit = Sales price per unit - Variable costs per unit = $16 - $12 = $4

Total Fixed Costs = $32,000

Break-even Sales = $32,000 / $4 = 8,000 units

Margin of Safety = ($64,000 - 8,000 units x $12 per unit) / $64,000 = $20,800 / $64,000 = 0.325 or 32.5%

Therefore, the projected margin of safety for the coming year is $20,800.

Ideal Company Ideal Company Produces and Sells a Single Product