Margin of Safety

Ciganda Company produces and sells strings of colorful indoor/outdoor lights for holiday display to retailers for $11.32 per string. The variable costs per string are as follows:

Line Item Description	Cost
Direct materials	$2.90
Direct labor	1.70
Variable factory overhead	0.48
Variable selling expense	0.42

Fixed manufacturing cost totals $426,024 per year. Administrative cost (all fixed) totals $289,254. The company expects to sell 98,300 strings of light next year.

Required:

1. Calculate the break-even point in units.

2. Calculate the margin of safety in units.

3. Calculate the margin of safety in dollars.

4. Conceptual Connection: Suppose Ciganda 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.)

Increase or Decrease