Matthew's Fish Fry has a monthly target operating income of $8300. Variable expenses are 80% of sales and monthly fixed expenses are $800. What is the monthly margin of safety as a percentage of target sales in dollars?

Question

Quizplus · Accepted Answer

Step 1: Calculate the total monthly fixed expenses and target sales in dollars:
Fixed expenses = $800
Target operating income = $8,300
Total expenses = Fixed expenses + Target operating income = $800 + $8,300 = $9,100

Step 2: Calculate the breakeven sales in dollars:

Breakeven sales = Total expenses / contribution margin ratio
Contribution margin ratio = 1 - variable expenses ratio
Variable expenses ratio = 80% = 0.8
Contribution margin ratio = 1 - 0.8 = 0.2

Breakeven sales = $9,100 / 0.2 = $45,500

Step 3: Calculate the margin of safety in dollars:

Margin of safety = Total sales - Breakeven sales
Total sales = Target operating income / contribution margin ratio = $8,300 / 0.2 = $41,500
Margin of safety = $41,500 - $45,500 = -$4,000

Step 4: Calculate the margin of safety percentage:

Margin of safety percentage = Margin of safety / Total sales x 100%
Margin of safety percentage = -$4,000 / $41,500 x 100% = -9.64%

The margin of safety is negative, which means that Matthew's Fish Fry is below the breakeven point and is not making a profit. Therefore, the monthly margin of safety as a percentage of target sales in dollars is not applicable. However, if we take the absolute value of the margin of safety and divide it by the total sales, we get:

Absolute margin of safety = $4,000
Margin of safety percentage = $4,000 / $41,500 x 100% = 9.64%

But the question asks for the margin of safety as a percentage of target sales, so the answer is not applicable.

Matthew's Fish Fry Has a Monthly Target Operating Income of $8300