What is the Margin of safety if the sales were 25000 units 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 margin of safety would be the amount by which the sales revenue is less that the intended amount while ensuring that a loss is not incurred. This cannot be determined for the case where a loss is being made.
Each unit of the game has a price of £99. When 25000 units are sold, the sales revenue is 99*25000 = £2475000. The variable costs per unit are £66. The total fixed costs in the creation of the game is £495000. The costs incurred in making 25000 units is 25000*66 + 495000 = £2145000.
The profit is the difference between the sales revenue and the costs. For 25000 units it is £330000.
The margin of safety here is £330000. Even if sales revenue from selling the gaming units is less by £330000 or the number of units sold is less than 25000 by 3333, the company will not suffer a loss.