Armand has opted to sell his famous funnel cakes at the local farmer's market instead of opening his own store. After his first month, he summarized the following financial data: unit variable cost per funnel cake was $2 and the monthly rental fee for the space at the market which includes electricity is $700. Armand initially decided to set the selling price per unit for each funnel cake at $4. If the sales for the first month were 500 funnel cakes, what was Armand's margin of safety in units?

Question

Quizplus · Accepted Answer

Margin of safety is current or forecasted unit sales levels minus the break-even point in units sold. Break-even point is equal to total fixed costs divided by contribution margin. Contribution margin is equal to selling price per unit less variable cost per unit, or $4 F1F1F1S1?F1F1F10 $2 = $2. Fixed costs of $700 per month divided by the contribution margin of $2 per funnel cake is equal to a monthly break-even point of 350 funnel cakes. Since Armand sold 500 funnel cakes in the first month, the margin of safety can be calculated as 500 F1F1F1S1?F1F1F10 350 = 150.

Armand Has Opted to Sell His Famous Funnel Cakes at the Local