Chapter 18 Margin of safety

Zhao Co. has fixed costs of %354,000.Its single product sells for $175 per unit, and variable costs are $116 per unit. If the company expects sales of $10,000 units, compute its margin of safety in dollars and as a percent of expected sales.





Explanation:

Break­-even point in units = $354,000 / ($175 ­ $116) = 6,000 unit

Sales at expected level (10,000 × $175)    1, 750,000

Sales at break­even level (6,000 × $175)    1,050,000

Margin of safety (%) = $700,000 / $1,750,000 = 40%

Explanation

Unit sales at target income = 354,000 + $118,000/ $59 = 8,000 units

Unit sales at target income == 8,000 units$59