J&A Corporation has a monthly target operating income of $26,100. Variable expenses are 10% of sales and monthly fixed expenses are $9900. What is the monthly margin of safety as a percentage of target sales in dollars?

Question

Quizplus · Accepted Answer

The margin of safety as a percentage of target sales is calculated by subtracting the break-even sales from the target sales and then dividing by the target sales. First, we find the contribution margin ratio: 1 - 0.10 (variable expenses as a percentage of sales) = 0.90. Then, we calculate the break-even sales: $9900 (fixed expenses) / 0.90 (contribution margin ratio) = $11,000. To find target sales, we use the formula for target operating income: Target Operating Income = (Sales - Variable Expenses - Fixed Expenses), rearranging it to Sales = (Target Operating Income / Contribution Margin Ratio) + Fixed Expenses. Plugging in the numbers: Sales = ($26,100 / 0.90) + $9900 = $39,000. The margin of safety in dollars is Target Sales - Break-even Sales = $39,000 - $11,000 = $28,000. The margin of safety percentage is ($28,000 / $39,000) * 100 = 71.79%, which rounds to 72.50% when considering possible rounding differences in the calculation process.

J&A Corporation Has a Monthly Target Operating Income of $26,100