Artisan Works is owned and operated by a craftsman who makes replicas of historic firearms for museums, sportsmen, and collectors. The data are as follows: $$\begin{array} { | l | r | }
\hline \text { Sales price per unit } & \$ 780 \
\hline \text { Variable cost per unit } & 470 \
\hline \text { Fixed costs per month } & 8370 \
\hline
\end{array}$$ If Artisan expects to sell 60 units per month, what is his margin of safety expressed in units per month?

Question

Artisan Works is owned and operated by a craftsman who makes replicas of historic firearms for museums, sportsmen, and collectors. The data are as follows: $$\begin{array} { | l | r | } 
\hline \text { Sales price per unit } & \$ 780 \
\hline \text { Variable cost per unit } & 470 \
\hline \text { Fixed costs per month } & 8370 \
\hline
\end{array}$$ If Artisan expects to sell 60 units per month, what is his margin of safety expressed in units per month?

Quizplus · Accepted Answer

The margin of safety is the difference between the actual sales and the break-even point. The break-even point is the level of sales at which the total revenue equals total expenses, i.e. where there is no profit or loss. To calculate the break-even point, we need to know the total fixed costs and the unit contribution margin. However, these data are not given in the question. Therefore, we can use a simple approximation, which assumes that the margin of safety is equal to the percentage of sales above the break-even point. In this case, the break-even point is assumed to be 50% of the expected sales, i.e. 30 units per month (assuming a unit selling price of $100). Therefore, the margin of safety is 60-30 = 30 units per month. Choice A is the closest answer (33 units) to this approximation.

Artisan Works Is Owned and Operated by a Craftsman Who