Question

Ricky's Repair Shop has a monthly target profit of $ 28,000. Variable costs are 80 % of​ sales, and monthly fixed costs are $ 12,000. Requirements 1. Compute the monthly margin of safety in dollars if the shop achieves its income goal. 2. Express Ricky's margin of safety as a percentage of target sales.

Answer 1

Answer: Margin of Safety(MOS) in dollars= $1,40,000

Margin of Safety(MOS) as a percentage of target sales = 70%

Explanation:

Given:

Target profit = $28000

Variable costs = 80 % of​ sales

Contribution = 20 % of​ sales

Fixed Costs = $12000

Required sales in units =
`(Fixed Costs +Target profit )/(Contribution margin per unit)`

Using the given in above formula;

Required sales in dollars =
`(12000+0)/(20)`

=$60000

Target sales =
`((Fixed Costs + Target profit))/(Contribution)`

Target sales = $200000

Margin of Safety(MOS) in dollars = Target Sales - Break-even point sales

Margin of Safety(MOS) in dollars = $200000 - $60000 = $140000

Margin of Safety(MOS) as a percentage of target sales =
`((140000)/(200000))* 100`

=70%