Posted: July 12th, 2016

# What is the company’s current margin of safety in units, dollars, and percentage?

Problem #1
Powertime, Inc., produces and sells electric lawn mowers for \$250 each. The variable costs of each
mower total \$160 while total monthly fixed costs are \$22,500. Current monthly sales are \$100,000.

The company is considering a proposal that will increase the selling price by 10%, increase total fixed
costs by 10% and increase unit sales to 500 units per month.

Required:
1) Compute the company’s current break-even point in units.
2) What is the company’s current margin of safety in units, dollars, and percentage?
3) Compute the company’s margin of safety in units assuming the proposal is accepted.
4) Compute the increase or decrease in profit assuming the proposal is accepted.

Problem #2
Costs that might be incurred by service, merchandising, and manufacturing companies are described below:

___ A. Sales commissions paid to sales associates in a department store
___ B. Insurance on a factory producing MP3 players
___ C. Chicken breasts used to make chicken sandwiches in a restaurant
___ D. Rent on a storeroom used by Larry’s Landscapers to store lawn equipment
___ E. Salary of a supervisor in a Wal-Mart distribution center
___ F. Wages paid to production workers in an automobile assembly plant
___ G. Pepperoni sausage used by a restaurant to make pizza
___ H. Shipping costs incurred by IBM to ship its computers to customers
___ I. Depreciation of office equipment by Microsoft Corporation
___ J. Electricity used to operate equipment in a factory
___ K. Salary of the CEO of General Motors Corporation
___ L. Lubricants used to maintain machinery in a textile factory
___ M. Cost of metal cans used in a dog food factory
___ N. Advertising costs incurred by AT&T
___ O. Fuel costs for an airline

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