Indigo Corp.has a selling price of $45 and variable costs of $30 per unit.When 10,000 units are sold,profits equaled $25,000.What is the margin of safety?
A)$75,000
B)$25,000
C)$80,000
D)$150,000

Question

Quizplus · Accepted Answer

Contribution Margin per unit = Selling Price - Variable Cost per unit
Contribution Margin per unit = $45 - $30 = $15
Profit = Total Contribution Margin - Fixed Costs
$25,000 = ($15 × 10,000) - Fixed Costs
Fixed Costs = $100,000
Break-Even Point (in units) = Fixed Costs / Contribution Margin per unit
Break-Even Point (in units) = $100,000 / $15 = 6,666.67 units (rounded up to 6,667 units)
Margin of Safety = Actual Sales - Break-Even Sales
Margin of Safety = 10,000 units - 6,667 units = 3,333 units
Margin of Safety in dollars = Margin of Safety × Selling Price
Margin of Safety in dollars = 3,333 × $45 = $150,000
Therefore, the margin of safety is $150,000.