A product has a selling price of $50, variable costs of $30, and fixed costs of
Practice Questions
Q1
A product has a selling price of $50, variable costs of $30, and fixed costs of $40,000. What is the margin of safety if the break-even sales are $100,000?
$20,000
$30,000
$10,000
$50,000
Questions & Step-by-Step Solutions
A product has a selling price of $50, variable costs of $30, and fixed costs of $40,000. What is the margin of safety if the break-even sales are $100,000?
Step 1: Identify the break-even sales, which is given as $100,000.
Step 2: Determine the actual sales. Since the selling price is $50, we can calculate actual sales by multiplying the number of units sold by the selling price. For this example, let's assume 2,400 units are sold (because 2,400 units x $50 = $120,000).
Step 3: Calculate the margin of safety using the formula: Margin of safety = Actual sales - Break-even sales.
Step 4: Substitute the values into the formula: Margin of safety = $120,000 - $100,000.
Step 5: Perform the subtraction: $120,000 - $100,000 = $20,000.
Step 6: Conclude that the margin of safety is $20,000.
Margin of Safety – The margin of safety measures how much sales can drop before a business reaches its break-even point.
Break-even Analysis – Understanding the break-even point is crucial for determining the level of sales needed to cover costs.
Variable and Fixed Costs – Recognizing the difference between variable costs (costs that change with production volume) and fixed costs (costs that remain constant regardless of production volume) is essential.
