Higgins Ltd manufactures a standard model of pressure cooker. The selling price of each pressure cooker is £45. Variable costs of manufacture are £10.70. During its 20X1 the company expects to incur fixed overheads of £110000. The sales director expects to sell 5000 pressure cookers during 20X1. What is the margin of safety (in units, to nearest whole unit)?

Question

Quizplus · Accepted Answer

Margin of safety = Expected sales - Break even sales
Break even sales = Fixed costs / Contribution per unit
Contribution per unit = Selling price - Variable costs per unit
Contribution per unit = £45 - £10.70 = £34.30
Break even sales = £110000 / £34.30 per unit = 3208 units
Expected sales = 5000 units
Margin of safety = 5000 - 3208 = 1792.8 ≈ 1793 units. Therefore, the best choice is C.

Higgins Ltd Manufactures a Standard Model of Pressure Cooker