Iggy's Ice Cream Shop has been selling an average of 500 banana splits per week for the past several months. If Iggy's price per banana split is $4, each split's variable costs are $1, and weekly fixed costs are $1,200, what is Iggy's current margin of safety on banana splits?

Question

Quizplus · Accepted Answer

Margin of safety is current or forecasted unit sales levels minus the break-even point in units sold. Break-even point is equal to total fixed costs divided by contribution margin. Contribution margin is equal to selling price per unit less variable cost per unit, or $4 F1F1F1S1?F1F1F10 $1 = $3. Fixed costs of $1,200 per week divided by the contribution margin of $3 per split is equal to a weekly break-even point of 400 banana splits. Since Iggy's has been selling an average of 500 banana splits a week, the margin of safety can be calculated as 500 F1F1F1S1?F1F1F10 400 = 100.

Iggy's Ice Cream Shop Has Been Selling an Average of 500