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A company manufactures a single product for which cost and selling price data are as follows:
Selling price per unit - Rs 12
Variable cost per unit - Rs 8
Fixed cost for a period - Rs 98,000
Budgeted sales for a period - 30,000 units
The margin of safety, expressed as a percentage of budgeted sales,is:
Selling price per unit - Rs 12
Variable cost per unit - Rs 8
Fixed cost for a period - Rs 98,000
Budgeted sales for a period - 30,000 units
The margin of safety, expressed as a percentage of budgeted sales,is:
Answer & Solution
Answer: Option
A
Solution:
This question asks us to find the Margin of Safety (MOS). Think of MOS as a safety net! It tells us how much our sales can drop before we start losing money. We need to express this safety net as a percentage of our planned (budgeted) sales.
Let's break down the information given:
* Selling Price per unit: Rs 12 (This is how much we sell one product for)
* Variable Cost per unit: Rs 8 (This is the cost that changes with each product we make, like raw materials for each product)
* Fixed Cost for a period: Rs 98,000 (These are costs that don't change, no matter how many products we make, like factory rent or salaries of permanent staff)
* Budgeted Sales for a period: 30,000 units (This is how many units we plan to sell)
Now, let's calculate step-by-step to find the Margin of Safety:
Step 1: Calculate Contribution Margin per Unit
The Contribution Margin is the money left from selling one unit after covering its variable cost. This money is then available to cover the fixed costs and, after that, contribute to profit.
Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = Rs 12 - Rs 8 = Rs 4 per unit
Step 2: Calculate Break-even Point in Units
The Break-even Point is the number of units we need to sell to cover all our fixed costs. At this point, we make no profit and no loss.
Break-even Point (in units) = Fixed Costs / Contribution Margin per unit
Break-even Point (in units) = Rs 98,000 / Rs 4 = 24,500 units
Step 3: Calculate Margin of Safety in Units
The Margin of Safety (MOS) in units is the difference between our planned sales (budgeted sales) and the sales we need to make to break even.
Margin of Safety (in units) = Budgeted Sales (in units) - Break-even Point (in units)
Margin of Safety (in units) = 30,000 units - 24,500 units = 5,500 units
This means we can afford for our sales to drop by 5,500 units from our planned sales before we start losing money.
Step 4: Express Margin of Safety as a Percentage of Budgeted Sales
We need to show our safety net (Margin of Safety) as a percentage of what we planned to sell (Budgeted Sales).
Margin of Safety (%) = (Margin of Safety in units / Budgeted Sales in units) * 100
Margin of Safety (%) = (5,500 units / 30,000 units) * 100
Margin of Safety (%) = 0.1833... * 100 = 18.33%
Let's break down the information given:
* Selling Price per unit: Rs 12 (This is how much we sell one product for)
* Variable Cost per unit: Rs 8 (This is the cost that changes with each product we make, like raw materials for each product)
* Fixed Cost for a period: Rs 98,000 (These are costs that don't change, no matter how many products we make, like factory rent or salaries of permanent staff)
* Budgeted Sales for a period: 30,000 units (This is how many units we plan to sell)
Now, let's calculate step-by-step to find the Margin of Safety:
Step 1: Calculate Contribution Margin per Unit
The Contribution Margin is the money left from selling one unit after covering its variable cost. This money is then available to cover the fixed costs and, after that, contribute to profit.
Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = Rs 12 - Rs 8 = Rs 4 per unit
Step 2: Calculate Break-even Point in Units
The Break-even Point is the number of units we need to sell to cover all our fixed costs. At this point, we make no profit and no loss.
Break-even Point (in units) = Fixed Costs / Contribution Margin per unit
Break-even Point (in units) = Rs 98,000 / Rs 4 = 24,500 units
Step 3: Calculate Margin of Safety in Units
The Margin of Safety (MOS) in units is the difference between our planned sales (budgeted sales) and the sales we need to make to break even.
Margin of Safety (in units) = Budgeted Sales (in units) - Break-even Point (in units)
Margin of Safety (in units) = 30,000 units - 24,500 units = 5,500 units
This means we can afford for our sales to drop by 5,500 units from our planned sales before we start losing money.
Step 4: Express Margin of Safety as a Percentage of Budgeted Sales
We need to show our safety net (Margin of Safety) as a percentage of what we planned to sell (Budgeted Sales).
Margin of Safety (%) = (Margin of Safety in units / Budgeted Sales in units) * 100
Margin of Safety (%) = (5,500 units / 30,000 units) * 100
Margin of Safety (%) = 0.1833... * 100 = 18.33%