Question

Robert's Repair Shop has a monthly target profit of $ 28000. Variable costs are 80 % of​ sales, and monthly fixed costs are $12000.

1. Compute the monthly margin of safety in dollars if the shop achieves its income goal.

2. Express Robert's margin of safety as a percentage of target sales.

3. Why would Robert's management want to know the​ shop's margin of​ safety?

Answer 1

1)

Contribution margin is 20% (ie 100% - 80% Variable cost)

breakeven sales = $12,000 / 20% = $60,000

Sales to achieve $28,000 profit = ($28,000 + $12,000) / 20% = $200,000

Margin of safety in dollars = $200,000 - $60,000 = $140,000

2)

Margin of safety as a percentage of target sales = ($200,000 - $60,000) / $200,000 = 70%

3) Margin of safety is the amount of sales after breakeven point. From Margin of safety sales, the entire contribution margin represents profits. In order to achieve the target profit, margin of safety sales must be known.