Divine Foods produces a gourmet condiment which sells for $16 per unit. Variable costs are $6 per unit, and fixed costs are $5,000 per month. If Divine expects to sell 1,500 units, compute the margin of safety in units.

Question

Quizplus · Accepted Answer

Margin of safety in units = Expected sales - Break-even sales
Break-even sales = (Fixed costs / Contribution margin per unit)
Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin per unit = $16 - $6 = $10
Break-even sales = ($5,000 / $10) = 500 units
Margin of safety in units = 1,500 units - 500 units = 1,000 units. Therefore, the best choice is B.

Divine Foods Produces a Gourmet Condiment Which Sells for $16