Sammy's Snow Cone Stand has been selling an average of 850 snow cones per week over the first five months of this year. Sammy's sells each cone for $2. Each snow cone incurs variable costs of $0.75, and Sammy's weekly fixed costs are $900. What is the stand's weekly margin of safety in units?
A) 95 cones
B) 80 cones
C) 130 cones
D) There is no margin of safety since Sammy's is not breaking even.

Question

Quizplus · Accepted Answer

Margin of safety is equal to current or forecasted sales level minus break-even point in units sold. Break-even point is calculated by first solving for contribution margin per unit, which is calculated as price per unit minus various cost per unit, then by dividing fixed costs by contribution margin per unit. Thus, contribution margin per snow cone is calculated as $2.00 F1F1F1S1?F1F1F10 $0.75 = $1.25. The weekly break-even point is calculated as $900 per week ÷ $1.25 per cone = 720 snow cones. Since Sammy's has been selling an average of 850 snow cones a week, the margin of safety can be calculated as 850 F1F1F1S1?F1F1F10 720 = 130 snow cones.

Sammy's Snow Cone Stand Has Been Selling an Average of 850