Budgeting Basics and Beyond

4.3. Impact of Income Taxes

If target income is given on an after-tax basis, the target income volume formula becomes:

Example 4

Assume in Example 1 that Flip Toy Store wants to achieve an after-tax income of $6,000. The tax rate is 40 percent. Then

Margin of Safety

The margin of safety is a measure of difference between the actual sales and the break-even sales. It is the amount by which sales revenue may drop before losses begin, and is expressed as a percentage of expected sales:

The margin of safety is used as a measure of operating risk. The larger the ratio, the safer the situation since there is less risk of reaching the break-even point.

Example 5

Assume Flip Toy Store projects sales of $35,000 with a break -even sales level of $25,000. The projected margin of safety is