A Company is planning to sell Product Z for $10 a unit.Variable costs are $6 a unit and fixed costs are $110,000.If the company is currently selling 30,000 units,what is the margin of safety in units?
A)2,500
B)5,000
C)27,500
D)25,000

Question

Quizplus · Accepted Answer

Margin of safety = (Actual Sales - Break-even Sales) / Actual Sales

Break-even sales = Fixed Costs / Contribution Margin per unit

Contribution Margin per unit = Selling Price per unit - Variable Costs per unit

Contribution Margin per unit = $10 - $6 = $4

Break-even sales = $110,000 / $4 = 27,500 units

Margin of safety = (30,000 - 27,500) / 30,000 = 0.083333

Margin of safety in units = 0.083333 x 30,000 = 2,500

Therefore, the margin of safety in units is 2,500, which is option A.

A Company Is Planning to Sell Product Z for $10