Question

​Matthew's Fish Fry has a monthly target operating income of​ $6,600. Variable expenses are​ 80% of sales and monthly fixed expenses are​ $840. What is the monthly margin of safety in dollars if the business achieves its operating income​ goal?

A. ​$29,760
B. ​$41,400
C. ​$33,000
D. ​$37,200

Answer 1

The correct answer is C

Step-by-step explanation:

Break even Sales is computed as:

Contribution margin ratio = Fixed Cost / Break even Sales

where

Contribution margin ratio = 1 - Variable expense of 80%

= 20%

Fixed Cost is $840

30% = $840 / Break even Sales

Break even Sales = $840 / 20%

= $4,200

The actual sales is computed as:

Actual Sales = (Fixed Cost + Desired Profit) / Contribution margin ratio

= ($840 + $6,600) / 20%

= $7,440 / 0.2

= $37,200

The margin of safety is computed as:

Margin of Safety = Actual Sales - Break even sales

= $37,200 - $4,200

= $33,000