What is the Margin of safety if the sales were 25000, or the sales revenue gave a profit of £264000 in the following case:
The directors of Upholland Ltd are planning for the launch of a new electronic game and are considering selling this new game for a Selling Price per unit of £99. It anticipates that the Variable cost per unit will be £66 and the Fixed costs attributable to this product are £495,000. The directors have not factored in any risks in their estimation of selling price and costs.
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The extent by which the number of units sold can be less than the target and the company still does not make a loss is the margin of safety.
Each unit of the gaming is sold for £99. The variable costs involved in each unit are £66 and the total fixed costs for the creation of the gaming units is £495000.
If the estimated sales are 25000 units, the sales revenue is 25000*99 = £2475000. The variable cost involved in the production of the units is £1650000. The total fixed costs are £495000. This gives the profit as£ 2475000 - £495000 - £1650000 = £330000. £330000 is the sales revenue earned by approximately 3333 units. Even if the sales are less than 25000 by 3333, the company does not have a loss.
When the sales revenue gives a profit of £264000, the margin of safety would be 2666 units.
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