Light Me Up Lamps has variable expenses of 40% of sales and monthly fixed expenses of $240,000. The monthly target operating income is $60,000.

What is the monthly margin of safety as a percentage of target sales in dollars?

Instructions are below.

Explanation:

Giving the following information:

Light Me Up Lamps has variable expenses of 40% of sales and monthly fixed expenses of $240,000. The monthly target operating income is $60,000.

We weren't provided with the selling price and unitary variable cost. Neither with the actual sales. But, I will provide the formulas and a small example to guide an answer.

Using the percentage of variable cost per sale, we can calculate the contribution margin ratio. The contribution margin ratio is the percentage of sales available to cover for fixed costs.

Contribution margin ratio= (1 -0.4=/1= 0.6

Now, we can calculate the break-even point in dollars with the desired profit:

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= (240,000 + 60,000) / 0.6

Break-even point (dollars)= $500,000

Let's suppose actual sales of $750,000.

Margin of safety= (current sales level - break-even point)

Margin of safety= (750,000 - 500,000)

Margin of safety= $250,000

Margin of safety ratio= (current sales level - break-even point)/current sales level

Margin of safety ratio= 250,000/750,000= 0.33= 33%

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