Mastery Problem: Target Income and Margin of Safety

Target Income and Margin of Safety

At the break-even point, sales and costs are exactly equal. However, the goal of most companies is to make a profit. When a company decides that it wants to earn more than the break-even point of income, it must define the amount it thinks it will realistically make. By modifying the break-even equation, the sales required to earn a target or desired amount of profit may be computed.

Complete the following: If a company makes $5 off of each unit it sells and has a target operating income of $5,000, then it must sell fill in the blank bcba6704ffde032_1 units. Similarly, if a company has a target operating income of $75,000 and knows that total expenses for the period will be $75,000, how much revenue must it earn to reach its target operating income? $fill in the blank bcba6704ffde032_2

Units sold or revenue earned above and beyond the break-even point contributes to the margin of safety for a company. Margin of safety is a crude measure of risk, in that it serves as the padding between profit and the break-even point.