Question

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

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