Ecco Company has total fixed costs of $5,000,sells a product whose contribution margin is $50 and selling price per unit is $125,and has current sales of $15,000.The company's margin of safety ratio is 20%.

Question

Quizplus · Accepted Answer

The margin of safety ratio is calculated as (Current Sales - Break-even Sales) / Current Sales. Break-even sales can be found by dividing the total fixed costs by the contribution margin ratio (Contribution Margin per Unit / Selling Price per Unit). In this case, the contribution margin ratio is $50 / $125 = 0.4. Break-even sales = $5,000 / 0.4 = $12,500. Therefore, the margin of safety ratio = ($15,000 - $12,500) / $15,000 = 16.67%, not 20%.

Ecco Company Has Total Fixed Costs of $5,000,sells a Product