A manufacturer sold 6,820 units of its product at the price of $40 last year. The variable cost per unit was $24. Their degree of operating leverage was 4. What was the margin of safety (in $) for this company last year? O$ 204,600 O$ 68,200 O$ 163,680 O none of the answers listed O $ 109,120

A manufacturer sold 6,820 units of its product at the price of $40 last year. The variable cost per unit was $24. Their degree of operating leverage was 4. What was the margin of safety (in $) for this company last year? O$ 204,600 O$ 68,200 O$ 163,680 O none of the answers listed O $ 109,120

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

A manufacturer sold 6,820 units of its product at the price of $40 last year. The variable cost per unit was $24. Their degree of operating leverage was 4.

What was the margin of safety (in $) for this company last year?

- $204,600
- $68,200
- $163,680
- none of the answers listed
- $109,120

Expert Solution

Step 1

Solution:

CM per unit = $40 - $24 = $16 per unit

Degree of operating leverage = 4

Contribution margin / EBIT = 4

(6820*$16) / 4 = EBIT

Operating income = $27,280

Fixed costs = Contribution margin - Operating income = ($6,820*16) - $27,280 = $81,840

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