Tom's Taxidermy has a monthly target operating income of $25,000. Variable expenses are 75% of sales and monthly fixed expenses are $15,000. What is the monthly margin of safety as a percentage of target sales in dollars?

Question

Quizplus · Accepted Answer

The margin of safety is the difference between target sales and breakeven sales, expressed as a percentage of target sales. Breakeven sales are the sales level at which the company's operating income is zero. To calculate breakeven sales, we can use the following formula:Breakeven sales = Fixed expenses / (1 - Variable expense ratio)In this case, the fixed expenses are $15,000 and the variable expense ratio is 75%. Therefore, the breakeven sales are:Breakeven sales = $15,000 / (1 - 0.75) = $60,000The margin of safety is then:Margin of safety = (Target sales - Breakeven sales) / Target salesMargin of safety = ($25,000 - $60,000) / $25,000 = 62.50%Therefore, the correct answer is A) 62.50%.

Tom's Taxidermy Has a Monthly Target Operating Income of $25,000