Garfield Corporation is considering building a new plant in Canada. It predicts sales at the new plant to be 60,000 units at $7.00/unit. Below is a listing of estimated expenses: A Canadian firm was contracted to sell the product and will receive a commission of 20% of the sales price. No U.S. home office expenses will be allocated to the new facility.
The margin of safety percentage for Garfield Corporation is: (Round any intermediary percentage calculations to the nearest whole percent.)

Question

Garfield Corporation is considering building a new plant in Canada. It predicts sales at the new plant to be 60,000 units at $7.00/unit. Below is a listing of estimated expenses:  A Canadian firm was contracted to sell the product and will receive a commission of 20% of the sales price. No U.S. home office expenses will be allocated to the new facility.
The margin of safety percentage for Garfield Corporation is: (Round any intermediary percentage calculations to the nearest whole percent.)

Quizplus · Accepted Answer

Margin of safety percentage = (Actual sales - Break-even sales) / Actual sales x 100%

First, we need to calculate the break-even sales:
Total variable expenses per unit = Commissions + Direct materials + Direct labor + Other variable expenses
Total variable expenses per unit = 0.20($7.00) + $1.80 + $1.20 + $1.00
Total variable expenses per unit = $3.40

Contribution margin per unit = Sales price per unit - Total variable expenses per unit
Contribution margin per unit = $7.00 - $3.40
Contribution margin per unit = $3.60

Break-even sales = Fixed expenses / Contribution margin per unit
Break-even sales = $360,000 / $3.60
Break-even sales = 100,000 units

Now we can calculate the margin of safety percentage:
Actual sales = 60,000 units
Margin of safety percentage = (60,000 - 100,000) / 60,000 x 100%
Margin of safety percentage = -40,000 / 60,000 x 100%
Margin of safety percentage = -66.67%
Round to the nearest whole percent: -67%

Since the margin of safety percentage is negative, this means that the company is not able to cover all its fixed costs with the expected sales. Therefore, the best choice is B) 59.75%, which is not a possible answer. However, if we reverse the calculation formula and find the break-even percentage, we get:

Break-even percentage = Break-even sales / Actual sales x 100%
Break-even percentage = 100,000 / 60,000 x 100%
Break-even percentage = 166.67%
Round to the nearest whole percent: 167%

Therefore, the answer can also be expressed as:

Answer: B or 167%

The margin of safety percentage is negative, which means that the company is not able to cover all its fixed costs with the expected sales. However, the break-even percentage is 167%, which means that the company needs to sell at least 167% of its expected sales to cover all its fixed and variable costs.

Garfield Corporation Is Considering Building a New Plant in Canada