Question

# Margin of Safety Yellow Sticker Company’s variable expenses are 40% of sales. The company has monthly...

Margin of Safety

Yellow Sticker Company’s variable expenses are 40% of sales. The company has monthly fixed expenses of \$15,000 and sells each unit for \$0.50. The monthly target operating income is \$5,250.

a.  What is the monthly margin of safety in dollars if Yellow Sticker Company achieves its operating income goal?

\$ _____

b.  What is the monthly margin of safety in units if Yellow Sticker Company achieves its operating income goal?

_____ units

#### Homework Answers

Answer #1

Answer- a)- The monthly margin of safety in dollars if Yellow Sticker Company achieves its operating income goal = \$8750.

Explanation- Monthly margin of safety in dollars = Total sales - Break even sales

= \$33750-\$25000

=\$8750

Total sales in dollars= (Fixed cost+ Target profit)/Contribution margin ratio

= (\$15000+\$5250)/60%

= \$33750

Where- Contribution margin ratio = 1-Variable cost ratio

= 1-.40

= .60 or 60%

Break even sales in dollars= Fixed cost/Contribution margin ratio

= \$15000/60%

= \$25000

b)- The monthly margin of safety in dollars if Yellow Sticker Company achieves its operating income goal = Margin of safety in dollars sales/ Selling price per unit

= \$8750/\$0.50 per unit

= 17500 units

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