Margin of Safety in Units Calculation
What is the margin of safety in units?
How can we calculate the margin of safety in units based on the provided data?
Margin of Safety in Units Calculation
The margin of safety in units can be calculated by subtracting the budgeted number of units from the break-even point in units.
Margin of Safety in Units is a crucial financial metric that helps businesses determine the level of protection they have against losses.
To calculate the margin of safety in units, we first need to determine the break-even point in units. This can be done by dividing the fixed costs by the contribution margin per unit. The contribution margin per unit is calculated by subtracting the variable costs per unit from the sales price per unit.
In this case, the sales price per unit is $6.28 and the variable costs per unit are $2.8. Therefore, the contribution margin per unit is $6.28 - $2.8 = $3.48.
Next, we calculate the break-even point in units by dividing the fixed costs ($9233) by the contribution margin per unit ($3.48). This gives us a break-even point of 2654 units.
Finally, to find the margin of safety in units, we subtract the budgeted number of units (4418) from the break-even point in units (2654). This will give us the margin of safety in units, which is 1764 units.
By knowing the margin of safety in units, businesses can gauge their cushion against potential losses and make more informed financial decisions.