Question

Yellow Sticker Company's variable expenses are 40% of sales. The company has monthly fixed expenses of $15,000 and sells each unit for $0.50. The monthly target operating! income is $6,750. a. What is the monthly margin of safety in dollars if Yellow Sticker Company achieves its operating income goal? in dollars b. What is the monthly margin of safety in units if Yellow Sticker Company achieves its operating income goal? units

Answer 1

Answer- a)- The monthly margin of safety in dollars if Yellow Sticker Company achieves its operating income goal = $11250.

Explanation- Monthly margin of safety in dollars = Total sales - Break even sales

= $36250-25000

=$11250

Total sales in dollars= (Fixed cost+ Target profit)/Contribution margin ratio

= ($15000+$6750)/60%

= $36250

Where- Contribution margin ratio = 1-Variable cost ratio

= 1-.40

= .60 or 60%

Break even sales in dollars= Fixed cost/Contribution margin ratio

= $15000/60%

= $25000

b)- The monthly margin of safety in dollars if Yellow Sticker Company achieves its operating income goal = Margin of safety in dollars sales/ Selling price per unit

= $11250/$0.50 per unit

= 22500 units