Hartville Kitchens has a monthly target operating income of $18,000.Variable expenses are 25% of sales and monthly fixed expenses are $12,000.What is the monthly margin of safety in dollars if the business achieves its operating income goal?

Question

Quizplus · Accepted Answer

The margin of safety is the difference between actual sales and the sales needed to break even. To calculate the margin of safety, we first need to calculate the break-even point. The break-even point is the sales level at which the business has no profit or loss. To calculate the break-even point, we use the following formula:Break-even point = Fixed expenses / (1 - Variable expense ratio)In this case, the fixed expenses are $12,000 and the variable expense ratio is 25%. Therefore, the break-even point is:Break-even point = $12,000 / (1 - 0.25) = $16,000The margin of safety is the difference between the actual sales and the break-even point. In this case, the actual sales are $18,000. Therefore, the margin of safety is:Margin of safety = Actual sales - Break-even point = $18,000 - $16,000 = $2,000

Hartville Kitchens Has a Monthly Target Operating Income of $18,000