Question

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

Answer 1

Answer:

margin of safety ratio is 7.5%

Explanation:

sales made/budgeted sales = $2000000

variable cost = $1100000

fixed costs = $750000

Total cost incurred = variable cost + fixed cost

                               = $1100000 + $750000

                               = $1850000

margin of safety = (sales made/budgeted sales) - (the break-even point)

Break-even point is the point where sales made is equal to total cost incurred

The break-even point is = $1850000 which is contained inside the sales made i.e the point where cost incurred meets sales made

while the margin of safety is = the sales made - the break even point

                                                = $2000000 - $1850000

                                                = $150000

Margin of safety ratio is calculated as = margin of safety / total sales * 100

the margin of safety ratio  = 150000/2000000 * 100

                                              = 0.075 * 100 = 7.5%

Answer 2

The break even point would be 1850000, and as Mercantile made 2000000, the margin of safety would be 150000.