Fontaine Corp.has a selling price of $15 and variable costs of $10 per unit.When 10,000 units are sold,profits equaled $25,000.What is the margin of safety?
A)$75,000
B)$25,000
C)$105,000
D)$50,000

Question

Quizplus · Accepted Answer

Margin of Safety = (Total sales - Breakeven sales) / Total sales
Breakeven sales = Fixed costs / Contribution margin per unit
Contribution margin per unit = Selling price - Variable costs per unit
Using the given information, we can calculate the contribution margin:
Contribution margin per unit = $15 - $10 = $5
Using the profits and contribution margin, we can calculate the breakeven sales:
$25,000 = (10,000 units - Breakeven sales) x $5
Breakeven sales = 5,000 units
Using the breakeven sales and selling price, we can calculate the total sales:
Total sales = 10,000 units x $15 = $150,000
Now we can calculate the margin of safety:
Margin of Safety = ($150,000 - (5,000 units x $15)) / $150,000 = 0.5
Margin of safety as a percentage is 50%, meaning that Fontaine Corp. could experience a 50% decrease in sales and still break even. Therefore, the best choice is (A) $75,000.