14SE - Horngren'S Financial And Managerial Accounting

Question

Use the following information to complete Short Exercises S20-10 through S20-15. 

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month. 

 

S20-14 Computing margin of safety 

Refer to the original information (ignoring the changes considered in Short Exercises S20-12 and S20-13). If Funday Park expects to sell 8,100 tickets, compute the margin of safety in tickets and in sales dollars.

Step-by-Step Solution

Answer

Margin of safety in units is 2,000 tickets.

Calculation of number of tickets funday park must sell to break even

$\begin{array}{c}\mathrm{Net} \mathrm{sales} \mathrm{revenue}-\mathrm{Variable} \mathrm{costs}-\mathrm{Fixed} \mathrm{costs}=\mathrm{Target} \mathrm{profit}\\ \left(\mathrm{Number} \mathrm{of} \mathrm{unit} \mathrm{ssold}\times \$28\right)\mathbf{-}\mathbf{\$}\mathbf{170}\mathbf{,}\mathbf{800}\mathbf{=}\mathbf{\$}\mathbf{0}\\ \mathrm{Number} \mathrm{of} \mathrm{units} \mathrm{sold}=6,100\mathrm{Units}\end{array}$

Calculation of margin of safety in units

$\begin{array}{c}\mathrm{Margin} \mathrm{of} \mathrm{safety} \mathrm{in} \mathrm{units}=\mathrm{Expected} \mathrm{sales}–\mathrm{Break} \mathrm{even} \mathrm{sales}\\ =8,100 \mathrm{tickets}–6,100\\ =2,000 \mathrm{tickets}\end{array}$

Calculation of margin of safety in dollars

$\begin{array}{c}\mathrm{Margin} \mathrm{of} \mathrm{safety} \mathrm{in} \mathrm{dollars}=\mathrm{Margin} \mathrm{of} \mathrm{safety} \mathrm{in} \mathrm{units}\times \mathrm{sales} \mathrm{price} \mathrm{per} \mathrm{unit}\\ =2,000\times \$70\\ =\$140,000\end{array}$