Light Me Up Lamps has variable expenses of 40% of sales and monthly fixed expenses of $240,000. The monthly target operating income is $60,000. What is the monthly margin of safety as a percentage of target sales in dollars?

Question

Quizplus · Accepted Answer

The margin of safety is calculated as (Actual Sales - Break-even Sales) / Actual Sales. First, calculate the break-even sales: Fixed Expenses / (1 - Variable Expense Ratio) = $240,000 / (1 - 0.40) = $400,000. Target sales for $60,000 operating income: ($240,000 + $60,000) / (1 - 0.40) = $500,000. Margin of safety = ($500,000 - $400,000) / $500,000 = 20%.

Light Me Up Lamps Has Variable Expenses of 40% of Sales