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.
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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.
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