Philadelphia Co. is considering the production and sale of a new product with the following sales and cost data: unit sales price, $300; unit variable costs, $180; total fixed costs, $270,000; and projected sales, $900,000. What is the margin of safety:(a) In dollar sales? And (b) As a percent of sales?
What will be an ideal response?
Contribution margin ratio = ($300 - $180)/$300 = 40%
Break-even point in dollar sales = $270,000/0.40 = $675,000
Margin of safety:
| (a) In sales dollars | = Sales - Break-even sales |
= $225,000
| (b) As a percent of sales | = (Sales - Break-even sales)/Sales |
= 25%
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