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Mercantile Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000.
-Mercantile's margin of safety ratio is
A) .15.
B) .25.
C) .33.
D) .75.

Question

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Mercantile Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000.
-Mercantile's margin of safety ratio is
A) .15.
B) .25.
C) .33.
D) .75.

Quizplus · Accepted Answer

The margin of safety ratio is calculated as (Sales - Break-even Sales) / Sales. First, find the break-even point: Break-even Sales = Fixed Costs / (1 - Variable Costs/Sales) = $900,000 / (1 - $800,000/$2,000,000) = $900,000 / (1 - 0.4) = $900,000 / 0.6 = $1,500,000. Then, Margin of Safety = ($2,000,000 - $1,500,000) / $2,000,000 = $500,000 / $2,000,000 = 0.25.

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