Question

Grimes Foods produces a gourmet salsa which sells for $28 per unit. Variable costs are $8 per unit, and fixed costs are $7,000 per month. If Grimes expects to sell 1,500 units, compute the margin of safety in dollars. A) $9,200 B) $30,000 C) $32,200 D) $23,000

Answer 1

Answer:

C) $32,200

Explanation:

The computation of the margin of safety is shown below:

= Expected sales - break even sales

where,

Break even point = (Fixed cost) ÷ (Contribution margin  Ratio)  

The Contribution margin per unit = Selling price per unit - Variable expense per unit  

= $28 - $8

= $20

And, Contribution margin = (Contribution margin per unit) ÷ (selling price per unit) × 100

So, the Profit volume ratio = (20) ÷ (28) × 100 = 71.43%

And, the fixed expenses is $7,000

Now put these values to the above formula  

So, the value would equal to  

= (7,000)÷ (71.43%)  

= $9,800

And,

Expected sales = Selling price per unit × Unit sales per month

= $28 × 1,500 units

= $42,000

And, the break even sales is $9,800

Now put these values to the above formula  

So, the value would equal to

= $42,000 - $9,800

= $32,200