Globus Autos sells a single product.8,000 units were sold resulting in $80,000 of sales revenue,$20,000 of variable costs,and $10,000 of fixed costs.If variable costs decrease by $1 per unit,the new margin of safety is ________.

Question

Quizplus · Accepted Answer

First, let's calculate the current margin of safety:
Margin of safety = Actual Sales - Break-even Sales
Break-even sales = Fixed Costs / Contribution Margin per Unit
Contribution Margin per Unit = Sales Price per Unit - Variable Cost per Unit

From the given data, we can calculate:
Contribution Margin per Unit = Sales Price per Unit - Variable Cost per Unit
= $80,000 / 8,000 units - $20,000 / 8,000 units
= $6 per unit

Break-even Sales = $10,000 / $6 per unit
= 1,667 units

Margin of safety = 8,000 units - 1,667 units
= 6,333 units

Now, if variable cost per unit decreases by $1, new variable cost per unit = $20,000 / 8,000 units - $1
= $1.50 per unit

New Contribution Margin per Unit = $80,000 / 8,000 units - $1.50 per unit
= $4.50 per unit

New Break-even Sales = $10,000 / $4.50 per unit
= 2,222 units

New Margin of safety = 8,000 units - 2,222 units
= 5,778 units

So, the new margin of safety is $68,235 (5,778 units x $6 per unit)
Therefore, the correct answer is C.

Globus Autos Sells a Single Product