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A Co, Manufactures and sells a single product for which the variable cost is $12 and the CS ratio is 40%. The Fixed costs are$80,000 per year. They are budgeting on selling 12,000 units per year. What is the Margin of Safety?
Note: Please show the calculation.
If the contribution is 40% of the selling price, then the variable cost must be 60%.
So the selling price per unit must be 12 / 60% = $20.
Breakeven revenue = fixed costs / CS ratio = 80,000 / 0.40 = $200,000
Therefore breakeven units = 200,000 / 20 = 10,000 unit.
Therefore margin of safety = (12,000 – 10,000) / 12,000 = 16.67%
(There was an error in the mock exam which has now been corrected – sorry. The correct answer is also in the test questions that are in the free lecture notes.)
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