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

Question

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

BlackTom AI · Accepted Answer

Contribution margin = Sales − Variable costs = $2,000,000 − $800,000 = $1,200,000. The contribution margin ratio (CM ratio) is contribution margin divided by sales: $1,200,000 / $2,000,000 = 0.60 (60%).

Break-even sales are found by dividing fixed costs by the CM ratio:
Break-even sales = Fixed costs / CM ratio = $900,000 / 0.60 = $1,500,000.

Margin of safety (MOS) in dollars equals actual sales minus break-even sales:
MOS ($) = $2,000,000 − $1,500,000 = $500,000.

Margin of safety ratio is the MOS in dollars divided by actual sales:
MOS ratio = $500,000 / $2,000,000 = 0.25 (25%).

Why these steps are appropriate:
- Contribution margin measures how much of each sales dollar is available to cover fixed costs and then profit; it is essential to compute break-even sales.
- Break-even sales = Fixed costs ÷ CM ratio gives the revenue needed to cover fixed costs when contribution margin per dollar is known.
- The margin of safety shows how much sales can fall before the firm reaches break-even; expressing it as a ratio normalizes the amount relative to current sales.

Why the correct answer is .25:
The computed MOS ratio (500,000 ÷ 2,000,000) yields 0.25, so 25% is the correct choice.

Why the other choices are incorrect:
- .15 would imply a MOS of $300,000 (15% of $2,000,000), but the true MOS is $500,000.
- .33 (≈33.3%) would imply a MOS of about $666,667, which does not match the calculated MOS.
- .75 (75%) would imply an unrealistically large MOS ($1,500,000), inconsistent with fixed costs and contribution margin.

Final confirmation: The correct margin of safety ratio is .25, matching the provided answer.

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单项选择题

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