ABC Ltd. sells a single product for Rs.50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to Rs.400,000. Current sales total 16,000 units. If ABC Ltd. sells 24,000 units, its safety margin will be:Select one:a.Rs.200,000.b.Rs.400,000.c.Rs.1,000,000.d.Rs.1,200,000.
Question
ABC Ltd. sells a single product for Rs.50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to Rs.400,000. Current sales total 16,000 units. If ABC Ltd. sells 24,000 units, its safety margin will be:Select one:a.Rs.200,000.b.Rs.400,000.c.Rs.1,000,000.d.Rs.1,200,000.
Solution
To calculate the safety margin, we need to first determine the contribution margin per unit. The contribution margin is the selling price minus the variable costs.
The selling price of the product is Rs.50, and the variable costs are 60% of the selling price. So, the variable cost per unit is 60% of Rs.50, which is Rs.30.
To find the contribution margin per unit, we subtract the variable cost per unit from the selling price per unit: Rs.50 - Rs.30 = Rs.20.
Next, we calculate the total contribution margin by multiplying the contribution margin per unit by the number of units sold. Currently, ABC Ltd. sells 16,000 units, so the total contribution margin is Rs.20 * 16,000 = Rs.320,000.
The safety margin is the difference between the total contribution margin and the fixed costs. The fixed costs are given as Rs.400,000.
So, the safety margin is Rs.320,000 - Rs.400,000 = -Rs.80,000.
Since the safety margin is negative, it means that ABC Ltd. is currently operating at a loss.
To find the safety margin if ABC Ltd. sells 24,000 units, we repeat the same calculations.
The total contribution margin for 24,000 units is Rs.20 * 24,000 = Rs.480,000.
The safety margin is then Rs.480,000 - Rs.400,000 = Rs.80,000.
Therefore, the correct answer is option a) Rs.200,000.
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