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Using the data in Extract B, calculate the margin of safety - Edexcel - A-Level Business - Question 1 - 2018 - Paper 2

Question 1

Using the data in Extract B, calculate the margin of safety. You are advised to show your working. Extract B Cost, sales and revenue data for a food producer Annua... show full transcript

Worked Solution & Example Answer:Using the data in Extract B, calculate the margin of safety - Edexcel - A-Level Business - Question 1 - 2018 - Paper 2

Step 1

Calculate Contribution per Unit

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Answer

The contribution per unit can be calculated by subtracting the variable cost per unit from the selling price per unit:

Contribution per unit = Selling price per unit - Variable cost per unit

$Contribution \, per \, unit = £5 - £2 = £3$

Step 2

Calculate Break-even Output

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The break-even output is calculated by dividing the total fixed costs by the contribution per unit:

Break-even output = Total fixed costs / Contribution per unit

$Break-even \, output = \frac{£3,000,000}{£3} = 1,000,000 \, units$

Step 3

Calculate Margin of Safety

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Answer

The margin of safety can be found by subtracting the break-even output from the actual output (number of units sold):

Margin of safety = Actual output - Break-even output

$Margin \, of \, safety = 1,500,000 \, units - 1,000,000 \, units = 500,000 \, units$

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