Answer the following questions using the information below:
Dr. Charles Hunter, MD, performs a certain outpatient procedure for $1,000. His fixed costs are $20,000, while his variable costs are $500 per procedure. Dr. Hunter currently plans to perform 200 procedures this month.
-What is the margin of safety assuming 100 procedures are budgeted?
A)$40,000 or 40 times
B)$50,000 or 50 times
C)$60,000 or 60 times
D)$100,000 or 100 times

Question

Quizplus · Accepted Answer

To calculate the margin of safety, we need to first calculate the break-even point (BEP) which can be found using the formula:

BEP = Fixed costs / (Price - Variable costs)
BEP = $20,000 / ($1,000 - $500)
BEP = 40 procedures

The margin of safety is the difference between the budgeted number of procedures and the BEP:

Margin of safety = Budgeted procedures - BEP
Margin of safety = 100 procedures - 40 procedures
Margin of safety = 60 procedures

To calculate the dollar value of the margin of safety, we multiply the number of procedures by the contribution margin (the amount each procedure contributes to covering fixed costs):

Margin of safety in dollars = Margin of safety x Contribution margin
Margin of safety in dollars = 60 procedures x ($1,000 - $500)
Margin of safety in dollars = $30,000

Therefore, the correct answer is C, $60,000 or 60 times.

Answer the Following Questions Using the Information Below