Question at position 9 [table]
Volley Distributors is a distributor of beach umbrellas commonly used at beach clubs. Information regarding the budget for the upcoming month is provided below. What is the company's margin of safety in dollars? | Selling price per unit | $20 | | | | Variable expense per unit | $10 | | | | Fixed expense per month | $15,000 | | | | Unit sales per month | 10,000 | | |
[/table]$170,000 $25,000$5,000 $70,000

Question

BlackTom AI · Accepted Answer

First, I’ll restate the given data and what we’re solving for. The question provides:
- Selling price per unit: $20
- Variable expense per unit: $10
- Fixed expense per month: $15,000
- Unit sales per month (budgeted): 10,000
We need to determine the margin of safety in dollars, which is defined as budgeted (or actual) sales minus break-even sales.

Now, step through each option and evaluate it:
- Option "$170,000": To verify, compute the budgeted sales in dollars: 10,000 units × $20 = $200,000. The contribution margin per unit is $20 − $10 = $10, so the contribution margin ratio is $10 / $20 = 0.5. Break-even sales in dollars = Fixed expenses ÷ CM ratio = $15,000 ÷ 0.5 = $30,000. Margin of safety = $200,000 − $30,000 = $170,000. This makes sense and matches the option. 
- Option "$25,000": This value would correspond to a much smaller margin of safety. If margin of safety were $25,000, either budgeted sales or break-even would have to be different from the computed figures above. Given the calculations, a margin of safety of $25,000 does not align with the data provided, so this is unlikely.
- Option "$5,000": Similarly, $5,000 would imply an even smaller cushion between budgeted sales and break-even. With budgeted sales at $200,000 and break-even at $30,000, the margin should be far larger than $5,000, not $5,000, so this is incorrect.
- Option "$70,000": This value would require a margin of safety of $70,000. While $200,000 − $130,000 would give $70,000, there is no calculation path here that yields a break-even of $130,000 with the given fixed costs and contribution margins. The break-even is $30,000 as computed, so $70,000 is not supported by the data.

Summarizing the reasoning: the correct margin of safety is obtained by calculating budgeted sales ($200,000), determining break-even sales using the contribution margin ratio (0.5) which gives $30,000, and subtracting to get $170,000. The other options fail to match these derived figures and therefore are not correct.

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