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Smith Company produces desk lamps. The information for June indicated that the selling price was $\$25$ per unit, variable costs were $\$15$ per unit, fixed costs totaled $\$6,000$, and the margin of safety in dollars was $\$12,500$. Smith currently sells 1,100 lamps and earns $\$5,000$ of profit. How much is Smith’s margin of safety ratio?

A.) 45.5%

B.) 2.5%

C.) 2.2%

D.) 40.0%

  1. To compute Margin of Safety Ratio you take (Margin of Safety in Dollars/Actual (expected) Sales)
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Thanks for the edit, I couldn't figure that out! – Daniel Loisi Mar 4 '11 at 4:24
up vote 0 down vote accepted

Hint: If they expect to sell 1,100 at $25 each, what are the expected sales? You already have the margin of safety, so it is just division from there.

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I was thinking that but I was not sure if I needed to calculate in the variable cost in the expected sales. Thanks! – Daniel Loisi Mar 4 '11 at 4:37
Looks to me like there is a lot of extra information. Maybe it is camouflage. – Ross Millikan Mar 4 '11 at 5:32

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