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

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Using the data in Extract B, calculate the margin of safety. You are advised to show your working.

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

Understanding the Margin of Safety

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Answer

The margin of safety represents the difference between actual sales volume and the break-even sales volume. It indicates how much sales can drop before the business incurs a loss.

Step 2

Calculation of Unit Contribution

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Answer

To find the unit contribution, we subtract the variable cost per unit from the selling price per unit:

extUnitContribution=extSellingPrice−extVariableCost=£5−£2=£3 ext{Unit Contribution} = ext{Selling Price} - ext{Variable Cost} = £5 - £2 = £3

Step 3

Calculation of Break-even Output

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Answer

The break-even output can be calculated using the formula:

extBreak−evenOutput=extTotalFixedCostsextUnitContribution=£3,000,000£3=1,000,000 units ext{Break-even Output} = \frac{ ext{Total Fixed Costs}}{ ext{Unit Contribution}} = \frac{£3,000,000}{£3} = 1,000,000 \text{ units}

Step 4

Margin of Safety Calculation

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Answer

Now we calculate the margin of safety using the following formula:

extMarginofSafety=extActualOutput−extBreak−evenOutput ext{Margin of Safety} = ext{Actual Output} - ext{Break-even Output}
Substituting in the values we have:

extMarginofSafety=1,500,000−1,000,000=500,000 units ext{Margin of Safety} = 1,500,000 - 1,000,000 = 500,000 \text{ units}

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