Food Mart produces gourmet cookies, which sell for $16 a basket.Variable costs per basket are $6 and ﬁxed costs are $5,000 per month.If Food Mart expects to sell 1,500 baskets of cookies, what is the margin of safety in number of baskets?

Question

Quizplus · Accepted Answer

The margin of safety is the difference between the actual sales quantity and the breakeven sales quantity.

To find the breakeven sales quantity, we need to calculate the total fixed costs and contribution margin per basket:

Total fixed costs = $5,000 per month
Contribution margin per basket = Selling price per basket – Variable costs per basket
= $16 – $6
= $10

Breakeven sales quantity = Total fixed costs ÷ Contribution margin per basket
= $5,000 ÷ $10
= 500 baskets

Therefore, the margin of safety is:

Margin of safety = Expected sales quantity – Breakeven sales quantity
= 1,500 – 500
= 1,000 baskets

So the answer is (D) 1,000.

Food Mart Produces Gourmet Cookies, Which Sell for $16 a Basket.Variable