The following monthly data are available for Seasons Company which produces only one product: Selling price per unit, $42; Unit variable expenses, $14; Total fixed expenses, $42,000; Actual sales for the month of June, 4,000 units. How much is the margin of safety for the company for June?

Question

BlackTom AI · Accepted Answer

Margin of safety equals actual (or budgeted) sales minus break-even sales. It can be expressed in dollars, units, or percent; here the answer choices are dollar amounts, so we compute the margin of safety in dollars.

1) Relevant concepts
- Contribution margin per unit = Selling price per unit − Unit variable expense.
- Break-even units = Total fixed expenses ÷ Contribution margin per unit.
- Break-even sales dollars = Break-even units × Selling price per unit.
- Margin of safety (dollars) = Actual sales dollars − Break-even sales dollars.
You can also compute margin of safety in units = Actual units − Break-even units, then convert to dollars by multiplying by price.

2) Step-by-step reasoning and calculations
- Selling price per unit = $42
- Unit variable expenses = $14
- Contribution margin per unit = $42 − $14 = $28

- Total fixed expenses = $42,000
- Break-even units = $42,000 ÷ $28 = 1,500 units

- Actual sales for June = 4,000 units
- Actual sales dollars = 4,000 × $42 = $168,000
- Break-even sales dollars = 1,500 × $42 = $63,000

- Margin of safety (dollars) = $168,000 − $63,000 = $105,000
Alternatively: Margin of safety in units = 4,000 − 1,500 = 2,500 units; 2,500 × $42 = $105,000.

3) Why the correct answer is correct
The margin of safety measures how much sales can drop before reaching break-even. Using standard formulas above yields $105,000, matching the dollar-based answer choice.

4) Why the other options are incorrect
- $70,000: equals 2,500 units × $28 CM per unit = margin of safety measured in contribution margin dollars, not sales dollars requested by the choices.
- $63,000: equals the break-even sales dollars, not the excess above break-even.
- $2,500: equals the margin of safety in units (4,000 − 1,500), not dollars.

Conclusion: The margin of safety for June is $105,000, which matches the provided correct answer.

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