Exercise 7-40 Margin of Safety Objective 5

Comer Company produces and sells strings of colorful indoor/outdoor lights for holiday display to retailers for $8.12 per string. The variable costs per string are as follows:

Direct materials $1.87 Direct labor 1.70 Variable factory overhead 0.57 Variable selling expense 0.42 Fixed manufacturing cost totals $245,650 per year. Administrative cost (all fixed) totals $297,606. Comer expects to sell 225,000 strings of lights next year.

Required:

Calculate the break-even point in units.

Calculate the margin of safety in units.

Calculate the margin of safety in dollars.

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.)