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Chapter 20: Q20-23RQ (page 1120)

What is the margin of safety? What are the three ways it can be expressed?

Short Answer

Expert verified

Answer

The margin of safety is a cushion between profit and loss.

Step by step solution

01

Meaning of margin of safety

The expected sales beyond breakeven sales is known as margin of safety. As a result, the margin of safety is the amount sales can drop before the company suffers an operating loss. It is like a cushion between profit and loss.

02

What are the three ways it can be expressed?

  1. Margin of safety in units
  2. Margin of safety in dollars
  3. Margin of safety ratio

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Most popular questions from this chapter

Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month.

S20-15 Computing degree of operating leverage

Refer to the original information (ignoring the changes considered in Short Exercises S20-12 and S20-13). If Funday Park expects to sell 8,100 tickets, compute the degree of operating leverage (round to two decimal places). Estimate the operating income if sales increase by 15%.

Question: Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are \(170,800 per month.

Using the Funday Park information presented, do the following tasks.

Requirements

1. Suppose Funday Park cuts its ticket price from \)70 to \(56 to increase the number of tickets sold. Compute the new breakeven point in tickets and in sales dollars.

2. Ignore the information in Requirement 1. Instead, assume that Funday Park increases the variable cost from \)42 to $56 per ticket. Compute the new breakeven point in tickets and in sales dollars.

What is sensitivity analysis? How do managers use this tool?

A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has \(6,000 in fixed costs per month. Calculate the breakeven point in units under each independent scenario.

14. Variable costs increase by \)10 per unit.

15. Fixed costs decrease by $600.

16. Sales price increases by 10%.

Calculating contribution margin

Glenn Company sells a product for \(80 per unit. Variable costs are \)60 per unit, and fixed costs are $800 per month. The company expects to sell 560 units in September. Calculate the contribution margin per unit, in total, and as a ratio.
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