Question

Sam’s Appliance Outlet has variable expenses of 40% of sales. The manager reported monthly fixed expenses of $270,000. The monthly target operating income is $75,000. What is the monthly margin of safety in dollars if the manager at Sam’s Appliance Outlet achieves the operating income goal?

Answer 1

$125,000

Step-by-step explanation:

total sales = ?S

variable expenses = S x 40%

fixed costs = $270,000

operating income = $75,000

S - 0.4S - $270,000 = $75,000

0.6S = $75,000 + $270,000 = $345,000

S = $345,000 / 0.6 = $575,000

total sales = $575,000

margin of safety = total sales - break even point

break even point = $270,000 / 0.6 = $450,000

margin of safety = $575,000 - $450,000 = $125,000

The margin of safety represents how much can a company's sales can fall until it reaches the break even point.