Using the same data (selling price £30, variable cost £18, fixed costs £48,000) the company expects to sell 5,000 units. What is the margin of safety as a percentage of expected sales?
Answer and explanation
Correct answer: C. 20%
- Step 1: Break-even = 4,000 units; expected sales 5,000 units.
- Step 2: Margin of safety = 5,000 − 4,000 = 1,000 units.
- Step 3: 1,000 ÷ 5,000 = 20%.
Answer
20%.
Why not the others: 80%: This is the break-even sales as a percentage of expected sales. 25%: This divides the margin of safety by break-even units instead of expected sales. 40%: This is the contribution/sales ratio (£12 ÷ £30), not the margin of safety.
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