Owen Company makes a product that sells for $61 per unit. The company pays $37 per unit for the variable costs of the product and incurs annual fixed costs of $360,000. Owen expects to sell 20,000 units of product.

Owen Company makes a product that sells for $61 per unit. The company pays $37 per unit for the variable costs of the product and incurs annual fixed costs of $360,000. Owen expects to sell 20,000 units of product.

Required

Determine Owen’s margin of safety expressed as a percentage.

 

Explanation

Begin by determining the break-even point and budgeted sales in dollars:

Break-even = Fixed cost ÷ Contribution margin per unit
Break-even = $360,000 ÷ ($61 − $37)
Break-even = 15,000 units
Break-even sales = $61 × 15,000 units = $915,000
Budgeted sales = $61 × 20,000 = $1,220,000

Margin of safety computations:

Thanks