Use the information below to answer the following question(s).
Ava's Fruit Cups has a monthly target operating income of $5,425. Variable expenses are 30% of sales and monthly fixed expenses are $9,800.
-What is Ava's Fruit Cups monthly margin of safety in dollars if the business achieves its operating income goal?

Question

Quizplus · Accepted Answer

The margin of safety in dollars is calculated by subtracting the break-even sales from the actual or projected sales. First, we need to find the sales needed to achieve the target operating income. We use the formula: Target Operating Income = (Sales - Variable Expenses) - Fixed Expenses. Rearranging the formula to solve for sales gives us: Sales = [(Target Operating Income + Fixed Expenses) / (1 - Variable Expense Ratio)]. Given that the Variable Expense Ratio is 30% or 0.3, we have: Sales = [($5,425 + $9,800) / (1 - 0.3)] = $21,750. To find the break-even point in sales, where operating income is $0, we use the formula with Target Operating Income set to $0: Break-even Sales = [$9,800 / (1 - 0.3)] = $14,000. The margin of safety in dollars = Actual or Projected Sales - Break-even Sales = $21,750 - $14,000 = $7,750.

Use the Information Below to Answer the Following Question(s)