J&A Corporation has a monthly target operating income of $41,400. Variable expenses are 10% of sales and monthly fixed expenses are $12,600. What is the monthly margin of safety in dollars if the business achieves its operating income goal?

Question

Quizplus · Accepted Answer

First, we need to find the total monthly sales needed to achieve the target operating income:

Target Operating Income = Sales - Variable Expenses - Fixed Expenses
$41,400 = 0.9Sales - $12,600
$54,000 = 0.9Sales
Sales = $60,000

Next, we need to find the margin of safety, which is the amount by which actual sales can drop before the company incurs a loss:

Margin of Safety = Total Sales - Break-even Sales
Margin of Safety = $60,000 - ($12,600 / 0.9)
Margin of Safety = $60,000 - $14,000
Margin of Safety = $46,000

Therefore, the margin of safety is $46,000.

J&A Corporation Has a Monthly Target Operating Income of $41,400