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If a company has a selling price of $80, variable costs of $50, and fixed costs

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Question: If a company has a selling price of $80, variable costs of $50, and fixed costs of $10,000, what is the margin of safety in dollars if they expect to sell 300 units?

Options:

  1. $2,000
  2. $4,000
  3. $6,000
  4. $8,000

Correct Answer: $6,000

Solution: 

Expected sales = 300 units * $80 = $24,000. Break-even sales = Fixed costs + (Variable costs * Units) = $10,000 + ($50 * 200) = $20,000. Margin of safety = Expected sales - Break-even sales = $24,000 - $20,000 = $4,000.

If a company has a selling price of $80, variable costs of $50, and fixed costs

Practice Questions

Q1
If a company has a selling price of $80, variable costs of $50, and fixed costs of $10,000, what is the margin of safety in dollars if they expect to sell 300 units?
  1. $2,000
  2. $4,000
  3. $6,000
  4. $8,000

Questions & Step-by-Step Solutions

If a company has a selling price of $80, variable costs of $50, and fixed costs of $10,000, what is the margin of safety in dollars if they expect to sell 300 units?
  • Step 1: Calculate the expected sales by multiplying the number of units expected to sell (300) by the selling price per unit ($80).
  • Step 2: Calculate the total variable costs by multiplying the variable cost per unit ($50) by the number of units at break-even point (200).
  • Step 3: Calculate the break-even sales by adding the fixed costs ($10,000) to the total variable costs from Step 2.
  • Step 4: Calculate the margin of safety by subtracting the break-even sales from the expected sales calculated in Step 1.
  • Margin of Safety – The margin of safety measures the difference between expected sales and break-even sales, indicating how much sales can drop before the company incurs a loss.
  • Break-even Analysis – Break-even analysis determines the sales level at which total revenues equal total costs, resulting in neither profit nor loss.
  • Variable and Fixed Costs – Understanding the distinction between variable costs (costs that change with production volume) and fixed costs (costs that remain constant regardless of production volume) is crucial for calculating profitability.
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