Pattillo Industries makes a product that sells for $25 a unit. The product has a $5 per unit variable cost and total fixed costs of $9,000. At budgeted sales of 1,000 units, the margin of safety percentage is 45%, 55%, 64%, none of these
BE = 900(25-5) = 450
Margin safety = budgeted - break even
1000-450 = 550
550(25)-450(25) = 2500
Percentage = 2500/(550*25) = 18.18%
None of these
To calculate the margin of safety percentage, we need to understand what it represents. The margin of safety measures the extent to which actual sales exceed the break-even point. It indicates the cushion a company has in case there is a decline in sales.
To calculate the margin of safety, we first need to calculate the break-even point. The break-even point is the point at which total revenue equals total costs, resulting in zero profit or loss.
To calculate the break-even point in units, we use the following formula:
Break-even point (in units) = Total Fixed Costs / Contribution Margin per unit
The contribution margin per unit is the selling price per unit minus the variable cost per unit. In this case, the selling price is $25 and the variable cost is $5, so the contribution margin per unit is $25 - $5 = $20.
Substituting the values into the formula, we have:
Break-even point (in units) = $9,000 / $20 = 450 units
Now that we know the break-even point, we can calculate the margin of safety. It is the difference between the budgeted sales and the break-even point, divided by the budgeted sales, expressed as a percentage.
Margin of Safety = (Budgeted Sales - Break-even point) / Budgeted Sales * 100
In this case, the budgeted sales are 1,000 units and the break-even point is 450 units.
Margin of Safety = (1,000 - 450) / 1,000 * 100 = 550 / 1,000 * 100 = 55%
Therefore, the correct answer is 55%.
To calculate the margin of safety percentage, we need to find the margin of safety and divide it by the budgeted sales.
The margin of safety is the difference between the actual or budgeted sales and the break-even point. The break-even point is the point where total revenue equals total costs, and there is no profit or loss.
To find the break-even point, we need to calculate the contribution margin per unit. The contribution margin per unit is the selling price per unit minus the variable cost per unit.
Contribution margin per unit = Selling price per unit - Variable cost per unit
= $25 - $5
= $20
Next, we'll calculate the break-even point in units. The break-even point can be calculated using the following formula:
Break-even point (in units) = Total fixed costs / Contribution margin per unit
= $9,000 / $20
= 450 units
Now, let's calculate the margin of safety:
Margin of safety = Budgeted sales - Break-even point
= 1,000 units - 450 units
= 550 units
Finally, we can calculate the margin of safety percentage:
Margin of safety percentage = (Margin of safety / Budgeted sales) * 100
= (550 units / 1,000 units) * 100
= 55%
Therefore, the margin of safety percentage is 55%.