Ideal Company Ideal Company produces and sells a single product.Information on its costs follow:
$\begin{array}{ll}
\text{Variable costs:}\
~~\text { SG\&A } & \$ 2 \text { per unit } \
~~\text { Production } & \$ 4 \text { per unit } \
\text { Fixed costs: } & \
~~\text { SG\&A } & \$ 12,000 \text { per year }\
~~\text { Production } & \$ 15,000 \text { per year }
\end{array}$ Refer to Ideal Company.In the upcoming year,Ideal Company estimates that it will produce and sell 4,000 units.The variable costs per unit and the total fixed costs are expected to be the same as in the current year.However,it anticipates a sales price of $16 per unit.What is Ideal Company's projected margin of safety for the coming year?
A)$7,000
B)$20,800
C)$18,400
D)$13,000

Question

Ideal Company Ideal Company produces and sells a single product.Information on its costs follow:
$\begin{array}{ll}
\text{Variable costs:}\
~~\text { SG\&A } & \$ 2 \text { per unit } \
~~\text { Production } & \$ 4 \text { per unit } \
\text { Fixed costs: } & \
~~\text { SG\&A } & \$ 12,000 \text { per year }\
~~\text { Production } & \$ 15,000 \text { per year } 
\end{array}$ Refer to Ideal Company.In the upcoming year,Ideal Company estimates that it will produce and sell 4,000 units.The variable costs per unit and the total fixed costs are expected to be the same as in the current year.However,it anticipates a sales price of $16 per unit.What is Ideal Company's projected margin of safety for the coming year?
A)$7,000
B)$20,800
C)$18,400
D)$13,000

Quizplus · Accepted Answer

The margin of safety is the difference between the budgeted sales and the breakeven sales. The budgeted sales are 4,000 units x $16 per unit = $64,000. The breakeven sales are calculated as follows:Fixed costs / (Sales price per unit - Variable cost per unit)= ($12,000 + $15,000) / ($16 - $6)= $27,000 / $10= 2,700 unitsTherefore, the margin of safety is $64,000 - $43,200 = $20,800.

Ideal Company Ideal Company Produces and Sells a Single Product