Ambrosia Foods produces a gourmet condiment that sells for $ 22 per unit. Variable cost is $ 8 per unit, and fixed costs are $ 8,000 per month. If Ambrosia expects to sell 1,500 units, compute the margin of safety in units

Margin of safety in units = 590.9 units (approx. 591 units)

Explanation:

To calculate this, we have to determine the margin of safety in terms of cash/amount, then convert it to units.

The margin of safety in this case is defined as the difference between the selling price and the break even point. It can simply be explained as the profit made on selling a product, gotten after deduction cost of production.

First of all, let us calculate the total cost of production for 1,500 units;

variable cost;

1 unit = $8

∴ 1,500 units = 1500 × 8 = $12,000

Fixed cost = $8,000

Therefore total cost of production = variable cost + fixed cost

= 12,000 + 8,000 = $20,000

Next, let us calculate the selling price;

1 unit = $22

∴1,500 units = 1,500 × 22 = 33,000

safety margin in cash = Selling price - cost price = 33,000 - 20,000

= $13,000

To convert this amount to units, let us find out how many units are sold for $13,000 as follows;

$22 = 1 units

∴ $13,000 units = (1/22) × 13,000 = 590.9 units

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