Margin of Safety Question

alexp19740

Hoping someone can help with this question:-
Z plc makes a single product which it sells for £16 per unit. Fixed costs are £76800 per month and the product has a contribution to sales ratio of 40%. In a period when budgeted sales were £224,000, what is the margin of safety in UNITS????

SandyHood

Alexp
In your exam remember you can ask your invigillator for paper to avoid trying to answer this type of question on-line.
C/s ratio x Price = contribution per unit
40% x £16 = £6.40 per unit

Total fixed costs/contribution per unit = Break even units
£76,800/£6.40 per unit = 12,000 UNITS

Budgeted Sales Revenue/Price per unit = Budgeted sales units
£224,000/£16 per unit = 14,000 units

Budgeted Sales Units - Break even sales units = Margin of Safety
14,000- 12,000 = 2,000 units

alexp19740

Thanks Sandy, much appreciated.