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.

Short answer

Margin of safety in units is 2,000 tickets.

Step-by-step solution

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

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