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Margin of Safety Yellow Sticker Company’s variable expenses are 40% of sales
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
Expert Solution
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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