Eastwick produces and sells three products.Last month's results are as follows:
$$\begin{array} { | l | r | r | r | }
\hline & \text { P1 } & \text { P2 } & \text { P3 } \
\hline \text { Revenues } & \$ 100,000 & \$ 200,000 & \$ 200,000 \
\hline \text { Variable costs } & 40,000 & 140,000 & 80,000 \
\hline
\end{array}$$
Fixed costs total $200,000.What is Eastwick's margin of safety? (Assume the current product mix. )

A) $83,333.
B) $40,000.
C) $460,000.
D) $115,385.

Question

Eastwick produces and sells three products.Last month's results are as follows: 
$$\begin{array} { | l | r | r | r | } 
\hline & \text { P1 } & \text { P2 } & \text { P3 } \
\hline \text { Revenues } & \$ 100,000 & \$ 200,000 & \$ 200,000 \
\hline \text { Variable costs } & 40,000 & 140,000 & 80,000 \
\hline
\end{array}$$
Fixed costs total $200,000.What is Eastwick's margin of safety? (Assume the current product mix. )

A) $83,333.
B) $40,000.
C) $460,000.
D) $115,385.

Quizplus · Accepted Answer

The margin of safety is calculated as (Actual Sales - Break-even Sales). Total sales are $500,000. Contribution margin is $240,000 ($500,000 - $260,000). Break-even sales = Fixed costs / Contribution margin ratio = $200,000 / ($240,000/$500,000) = $416,667. Margin of safety = $500,000 - $416,667 = $83,333.

Eastwick Produces and Sells Three Products Fixed Costs Total $200,000