The New York Company has a maximum capacity of 200,000 units per year. Variable manufacturing costs are $9 per unit. Fixed overhead is $450,000 per annum. Variable selling and administrative costs are $3.75 per unit, and fixed selling and administrative costs are $225,000 per annum. The current selling price is $17.25 per unit.

There is a shortage of materials due to a strike at one of the companys major suppliers, so the current years production and sales is limited to 160,000 units. To partially offset the effect of the reduced sales on profit, management is planning to reduce total fixed costs to $630,750. Variable cost per unit is the same as last year. The company has already sold 30,000 units at the regular selling price per unit of $17.25.

1. Required: What amount of fixed costs is covered by the total contribution of the first 30,000 units sold? (Show all working)
2. What contribution per unit will be needed on the remaining 130,000 units to cover the remaining fixed costs and earning a profit of $157,500 this year? (Show all working)
3. Explain what you understand by the margin of safety.