Question

Light Me Up Lamps has variable expenses of 40% of sales and monthly fixed expenses of $216,000. The monthly target operating income is $24,000. What is the monthly margin of safety in dollars if Light Me Up Lamps achieves its operating income goal

Answer 1

$40,000

Step-by-step explanation:

The margin of the safety (MOS) is the amount by which the budgeted sales exceeds the break-even point. The break-even point (BEP) sales is that sales which produces no profit or loss.

MOS = Sales - BEP

BEP = Fixed cost/contribution margin

Contribution margin ratio (CMR) = 100-40= 60%

BEP = 216,000/60%

BEP = $360,000

Sales to achieve operating income = (Fixed cost + operating income)/CMR

= (216,000 + 24,000)/60%

=$400,000

Margin of safety = 400,000 - 360,000

= $40,000