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Garfield Corporation is considering building a new plant in Canada
Garfield Corporation is considering building a new plant in Canada. It predicts sales at the new plant to be 50,000 units at $7/unit. Below is a listing of estimated expenses: Category Materials Labor Overhead Marketing/Admin % of Annual Expense that Total Annual Expenses are Fixed $40,000 10% $60,000 30% $80,000 30% $70,000 50% A Canadian firm was contracted to sell the product and will receive a commission of 20% of the sales price. No U.S. home office expenses will be allocated to the new facility. The margin of safety percentage for Duncan Enterprises is (Round any intermediary percentage calculations to the nearest whole percent.) A. 3.61%. B. 172.32%. C. 38.27% D. 27.68%
Expert Solution
Price per unit = $7
Total Materials Expense = $40,000 | Percentage of expense which is fixed = 10%
Fixed Material Expense = 10% * 40,000 = $4,000 | Variable Material expense = 40,000 - 4,000 = $36,000
Total Labor Expense = $60,000 | Percentage of expense which is fixed = 30%
Fixed Labor Expense = 30% * 60,000 = $18,000 | Variable Labor expense = 60,000 - 18,000 = $42,000
Total Ovehead Expense = $80,000 | Percentage of expense which is fixed = 30%
Fixed Overhead Expense = 30% * 80,000 = $24,000 | Variable Overhead expense = 80,000 - 24,000 = $56,000
Marketing/Adm = $70,000 | Percentage of expense which is fixed = 50%
Fixed Marketing/Adm Expense = 50% * 70,000 = $35,000 | Variable Marketing/Adm expense = 70,000 - 35,000 = $35,000
Units Sold = 50,000
Now we will find the Total Variable costs and Total Fixed Costs by summing the respective components from each Expense.
Total Fixed Costs = 4,000 + 18,000 + 24,000 + 35,000 = $81,000
Total Variable Costs = 36,000 + 42,000 + 56,000 + 35,000 = $169,000
Variable Sales commission per unit = 20% of Price = 20% * 7 = $1.40
Variable Costs per unit = Total Variable Costs / Units Sold + Variable Selling Expense per unit
= 169,000 / 50,000 + 1.40
Variable Costs per unit = $4.78
Contribution Margin per unit = Price per unit - Variable costs per unit = 7 - 4.78 = $2.22
Break-even Point in Units = Total Fixed Costs / Contribution Margin per unit = 81,000 / 2.22
Break-even Point in Units = 36,486.49 or 36,487 units (rounded up to nearest whole number)
We know, Margin of Safety percentage = (Current Sales units - Break-even Point units) / Current Sales units
Margin of Safety percentage = (50,000 - 36,487) / 50,000 = 13,513 / 50,000
Hence, Margin of Safety percentage = 27.03% which is closest to Option D.
Since no intermediary percentage calculation was required which could be rounded, which is why answer is not exactly as the option.
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