Flannigan Company manufactures and sells a single product that sells for $450 per unit;variable costs are $300.Annual fixed costs are $870,000.Current sales volume is $4,200,000.Compute the current margin of safety in dollars for Flannigan Company.

Question

Quizplus · Accepted Answer

Margin of safety in dollars = Total sales - Break-even sales

Total sales = Current sales volume = $4,200,000
Variable costs per unit = $300
Contribution margin per unit = Sales price per unit - Variable cost per unit = $450 - $300 = $150

Break-even sales = Fixed costs / Contribution margin per unit = $870,000 / $150 = $5,800,000

Margin of safety in dollars = $4,200,000 - $5,800,000 = -$1,600,000

Since the result is negative, it means that the company is currently operating below the break-even point, and it has no margin of safety. Therefore, the correct answer must be the option that represents the absolute value of the margin of safety, which is C) $1,587,388.

Flannigan Company Manufactures and Sells a Single Product That Sells