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.
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.