Margin of Safety
Comer Company produces and sells strings of colorful indoor/outdoor lights for holiday display to retailers for $10.76 per string. The variable costs per string are as follows:
Direct materials $1.87
Direct labor 1.70
Variable factory overhead 0.57
Variable selling expense0.42
Fixed manufacturing cost totals $461,900 per year.
Administrative cost (all fixed) totals $292,640.
Comer expects to sell 230,500 strings of light next year.
Required:
1. Calculate the break-even point in units.
2. Calculate the margin of safety in units.
3. Calculate the margin of safety in dollars.
4. Conceptual Connection: Suppose Comer actually experiences a price decrease next year while all other costs and the number of units sold remain the same. Would this increase or decrease risk for the company? (Hint: Consider what would happen to the number of break-even units and to the margin of safety.)