Monthly margin of safety as a percentage of target sales
Total Contribution margin = Net operating income + fixed expenses
= $7,000 + $880
= $7,880
Contribution margin ratio = 100% - Variable cost ratio
= 100% - 80%
= 20%
Target sales in dollars = Total Contribution margin / Contribution margin ratio
= $7,880 / 0.20
= $39,400
Break even sales in dollars = Total fixed expenses / Contribution margin ratio
= $880 / 0.20
= $4,400
Margin of safety in dollars = Target total sales – Break even sales
= $39,400 - $4,400
= $35,000
Therefore, the Monthly margin of safety as a percentage of target sales = [Margin of safety in dollars / Target total sales] x 100
= [$35,000 / $39,400] x 100
= 88.83%
“Hence, the Monthly margin of safety as a percentage of target sales will be 88.83%”
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