Mercantile Corporation has sales of $2,000,000, variable costs of $1,100,000, and fixed costs of $750,000.Mercantile's margin of safety ratio is
A).08.
B).17.
C).20.
D).83.

Question

Quizplus · Accepted Answer

The margin of safety ratio is calculated as (Actual Sales - Break-even Sales) / Actual Sales. Break-even Sales = Fixed Costs / Contribution Margin Ratio. Contribution Margin = Sales - Variable Costs = $2,000,000 - $1,100,000 = $900,000. Contribution Margin Ratio = $900,000 / $2,000,000 = 0.45. Break-even Sales = $750,000 / 0.45 = $1,666,667. Margin of Safety = $2,000,000 - $1,666,667 = $333,333. Margin of Safety Ratio = $333,333 / $2,000,000 = 0.1667 or approximately 0.17.

Mercantile Corporation Has Sales of $2,000,000, Variable Costs of $1,100,000