Margin of Safety Head-First Company plans to sell 5,150 bicycle helmets at $68 each in the coming year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Break-even units equal 2,152. Required: 1.  Calculate the margin of safety in terms of the number of units. 2.  Calculate the margin of safety in terms of sales revenue.

Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter7: Cost-volume-profit Analysis
Section: Chapter Questions
Problem 26BEB: Variable Cost Ratio, Contribution Margin Ratio Chillmax Company plans to sell 3,500 pairs of shoes...
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  1. Margin of Safety

    Head-First Company plans to sell 5,150 bicycle helmets at $68 each in the coming year. Unit variable cost is $45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals $49,500 (includes fixed factory overhead and fixed selling and administrative expense). Break-even units equal 2,152.

    Required:

    1.  Calculate the margin of safety in terms of the number of units.

    2.  Calculate the margin of safety in terms of sales revenue.

 
Expert Solution
Step 1

Margin of safety is defined as sales more than the break even sales, hence if we have sales more than break even then we have margin of safety.

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