Divine Foods produces a gourmet condiment which sells for $16 per unit. Variable costs are $6 per unit, and fixed costs are $5,000 per month. If Divine expects to sell 1,500 units, compute the margin of safety in units.
A) 500 units
B) 1,000 units
C) 1,500 units
D) 8,000 units
Answer: B) 1,000 units
Explanation: B)
Sales price per unit $16
Less variable cost per unit -6
Contribution margin per unit $10
Required sales in units = (Fixed costs + Target profit) ÷ Contribution margin per unit
Required sales in units = ($5,000 + 0) ÷ $10 = 500 units
Expected sales - Breakeven sales = Margin of safety in units
1,500 units - 500 units = 1,000 units
Diff: 2
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