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 $10,500.

Answer 1

Answer :

Contribution Margin - Fixed Cost = Net Operating Income

Contribution Margin - $15,000 = $10,500

Contribution Margin = $10,500 + $15,000

Contribution Margin = $25,500

Sales Price = $0.50/unit (Given)

Variable Cost = 40% of Sales (Given)

Let Actual Sales be x

Actual Sales - Variable Cost = Contribution Margin

x - 40% of x = $25,500

60% of x = $25,500

x = $25,500/60%

x = $42,500

Actual Sales = $42,500

Breakeven Sales = Fixed Cost / Contribution Margin Ratio

Contribution Margin Ratio = (Contribution Margin / Actual Sales) * 100

Contribution Margin Ratio = ($25,500/$42,500) * 100

Contribution Margin Ratio = 0.6 * 100

Contribution Margin Ratio = 60%

Breakeven Sales = Fixed Cost / Contribution Margin Ratio

Breakeven Sales = $15,000 / 60%

Breakeven Sales = $25,000

Margin of Safety (in $) = Actual Sales - Breakeven Sales

Margin of Safety (in $) = $42,500 - $25,000

Margin of Safety (in $) = $17,500

Margin of Safety (in units) = Margin of Safety (in $) / Sales price per unit

Margin of Safety (in units) = 17,500 / 0.50

Margin of Safety (in units) = 35,000 units