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Calculate the margin of safety as a percentage

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Question - Noman, a friend of yours, has come to you for financial advice. He is about to set up in business, manufacturing and selling oak computer desks. He provides you with the following information:

Per unit

Material costs Rs.70

Labour costs Rs.80

Variable overheads Rs.30

Per annum

Rent, rates and other office overheads Rs.150, 000

The above figures are based on a budgeted production of 2,000 computer desks, although there is production capacity for 2,500 desks. The budgeted selling price is Rs.270 per desk.

REQUIRED -

a) Compute the break-even point in units and the margin of safety in units at the budgeted level of production.

b) Calculate the margin of safety as a percentage and briefly comment on your answer.

c) What is the profit at the budgeted level of production?

d) Harvey has had an offer to utilize his spare capacity by making 500 computer desks for a price of Rs.230 per desk. He intends rejecting this offer as the price is well below his normal selling price. Advise Noman, giving reasons for your advice.

Reference no: EM132542692

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