Tao Company has fixed costs of $708,000. Its single product sells for $350 per unit, and variable costs are $232 per unit. If the company expects sales of 10,000 units, its margin of safety as a percent of expected sales is: Multiple Choice 40%. 50%. 35%. 45%. 60%.

Margin of safety is the extent to which current sales level exceeds the breakeven sales level, bearing in mind that breakeven sales level is the sales revenue at which total costs are the same as total revenue.

In the first we need to determine the breakeven sales level, which is fixed costs divided by the contribution margin per unit(contribution margin per unit is the selling price minus variable costs)

breakeven sales=fixed costs/contribution margin

fixed costs=$708,000

contribution margin=$350-$232

contribution margin=$118

breakeven sales=$708,000/$118

breakeven sales=6,000 units

margin of safety=(current level of sales-breakeven sales)/current level of sales

current level of sales=10,000 units

margin of safety=(10,000-6,000)/10,000

margin of safety=40%

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