The safety margin is calculated by subtracting break-even units from current sales, yielding $115000.
The margin of safety is an investing idea that states that an investor should only buy assets if their market price is much lower than their true worth. In other words, the margin of safety is the gap between the market price of an asset and your estimate of its underlying worth.
According to the scenario, the given data are as follows:
Selling price = $100 / unit
Current sales = 10,600units
So, current sales value = 10,600 × $100 = $1,060,000
Break-even sales = 9540 units
So, Break-even sales value = 9450* 100 = $9,45,000
So, we can calculate the margin of safety by using the following formula:
Margin of safety = Current sales value - Break-even sales value
= $1,060,000-$9,45,000
=$115000
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