RAM Auto Parts' CEO wants to obtain additional financing from the company's bank.The banker wants to know the company's margin of safety.If revenues of the company for the current year total $4 million, widgets are sold at $20 per unit, the variable cost per unit is $16, fixed costs are $500,000, how much is the margin of safety?

Question

Quizplus · Accepted Answer

The margin of safety is calculated as (Current Sales - Break-even Sales) / Current Sales. First, find the break-even point in units: Fixed Costs / (Selling Price per Unit - Variable Cost per Unit) = $500,000 / ($20 - $16) = 125,000 units. Then, find the break-even sales in dollars: 125,000 units * $20 = $2,500,000. Finally, calculate the margin of safety: ($4,000,000 - $2,500,000) / $4,000,000 = 37.5%.

RAM Auto Parts' CEO Wants to Obtain Additional Financing from the Company's