Question

Selling price $ 200 per unit

Answer 1

Answer:

1) Margin of safety = $1,000,000 so that is c)

2) Margin of safety (%) = 20%, that is a)

Explanation:

Hi, first, we need to introduce the formulas to use.

Margin of safety (Dollars)

$MarginSafety=ActualSales-BEP(dollars)$

Margin of safety (%)

$MarginSafety=\frac{CurrentSales-BEP(dollars)}{CurrentSales} *100$

Where

BEP = Break even point in dollars

This means that we need to find the break even point first, the formula to use is:

$BEP(units)=\frac{FixedExpenses}{Price-VarExpense}$

From there, we need the break even point in dollars, so:

$BEP(dollars)=BEP(units)*Price$

Everything should look like this

$BEP(units)\frac{1,000,000}{200-150} =20,000$

And the BEP in dollars is:

$BEP(dollars)=20,000*200=4,000,000$

Now, we know that our actual level of sales is 25,000*$200=$5,000,000, therefore Ralph Corporation margin of safety is:

$MarginSafety=5,000,000-4,000,000=1,000,000$

So, the answer is c. Ralph Corporation’s margin of safety in dollars is $1 million.

Now for the next part, everything should look like this.

$MarginSafety(percent)=\frac{5,000,000-4,000,000}{5,000,000} *100=20$

Then, the answer is a.  Ralph Corporation’s margin of safety in percentage is 20%

Best of luck.