Wang Co.manufactures and sells a single product that sells for $450 per unit; variable costs are $270 per unit.Annual fixed costs are $800,000.Current sales volume is $4,200,000.Compute the current margin of safety in dollars.
A)$1,560,000.
B)$2,000,000.
C)$2,200,000.
D)$2,895,652.
E)$2,460,000.

Question

Quizplus · Accepted Answer

Margin of safety = Current Sales - Break-even Sales
Break-even sales = (Fixed Costs / Contribution Margin Ratio)
Contribution Margin Ratio = (Selling Price per unit - Variable Cost per unit) / Selling Price per unit

First, we need to calculate the contribution margin ratio:
Contribution Margin Ratio = (450 - 270) / 450 = 0.4

Next, we can calculate the break-even sales:
Break-even sales = (800,000 / 0.4) = $2,000,000

Finally, we can calculate the margin of safety:
Margin of safety = 4,200,000 - 2,000,000 = $2,200,000

Therefore, the correct answer is C.

Wang CoManufactures and Sells a Single Product That Sells for $450