Eastwick produces and sells three products. Last month's results are as follows:
$\begin{array}{llr}
&\text { P1 } &\text { P2 } &\text { P3 } \
\text { Revenues } &\$100,000&\$200,000&\$200,000\
\text {Variable costs } &40,000&140,000&80,000
\end{array}$

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Fixed costs total $200,000. What is Eastwick's margin of safety? (Assume the current product mix.)
A) $83,333.
B) $40,000.
C) $460,000.
D) $115,385.

Question

Eastwick produces and sells three products. Last month's results are as follows:
$\begin{array}{llr}
  &\text { P1 } &\text { P2 } &\text { P3 } \
 \text { Revenues } &\$100,000&\$200,000&\$200,000\
 \text {Variable costs  } &40,000&140,000&80,000
\end{array}$
 
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Fixed costs total $200,000. What is Eastwick's margin of safety? (Assume the current product mix.)
A) $83,333.
B) $40,000.
C) $460,000.
D) $115,385.

Quizplus · Accepted Answer

The margin of safety is the difference between current sales and the breakeven point. The breakeven point is the level of sales at which the company makes neither a profit nor a loss. To calculate the breakeven point, we need to divide the fixed costs by the contribution margin. The contribution margin is the difference between sales and variable costs.For Eastwick, the contribution margin is:CM = Sales - Variable costsCM = $500,000 - $260,000CM = $240,000The breakeven point is:BEP = Fixed costs / Contribution marginBEP = $200,000 / $240,000BEP = $833.33The margin of safety is:MOS = Sales - Breakeven pointMOS = $500,000 - $833.33MOS = $416,666.67Therefore, the correct answer is A) $83,333.

Eastwick Produces and Sells Three Products - Fixed Costs Total $200,000

Eastwick Produces and Sells Three Products -
Fixed Costs Total $200,000