4-29 Margin of Safety

Comer Company produces and sells strings of colorful indoor/outdoor lights for holiday display to retailers for $12.14 per string. The variable costs per string are as follows:

Direct materials$1.87Direct labor1.70Variable factory overhead0.57Variable selling expense0.42

Fixed manufacturing cost totals $519,988 per year. Administrative cost (all fixed) totals $351,712. Comer expects to sell 206,900 strings of light next year.

Required:

1.Calculate the break-even point in units.

units

2.Calculate the margin of safety in units.

units

3.Calculate the margin of safety in dollars.

$

4.Conceptual Connection: Suppose Comer actually experiences a price decrease next year while all other costs and the number of units sold remain the same. Would this increase or decrease risk for the company? (Hint:Consider what would happen to the number of break-even units and to the margin of safety.)