Share
Explore BrainMass

Margin of Safety

When Maria was considering buying the peanut butter cookie plant, one of her options was to convert it to make more lemon crème cookies, since near-term demand for the lemon crème cookies exceeded current capacity by 600,000 packs. What should Maria have done if the breakeven volume of lemon crème cookies in this new plant were 650,000 packs and continuing to make peanut butter cookies would not have been profitable?

When considering a large bulk order, how should one use the concept of contribution margin to decide which cookie's production to reduce in order to free up enough capacity to accept the bulk order? Under what circumstances should she not have accepted the bulk order?

Solution Preview

Maria should discontinue making peanut butter cookies as it is not profitable. It should increase the capacity of the plant much beyond the 600000 packs as its break even point is 650000 packs. Now one should know following terms to do break even analysis:

BREAK EVEN POINT ( Sales IN UNITS)=

FIXED COSTS /CONTRIBUTION PER UNIT
BREAK EVEN ...

Solution Summary

This provides the steps to calculate the Margin of Safety

$2.19