Final answer:
To calculate the margin of safety ratio for Warner manufacturing, we use the formula (Actual Sales - Break-Even Sales) / Actual Sales. In this case, the margin of safety ratio is 0.6 or 60%, indicating a 60% cushion in sales above the break-even point.
Step-by-step explanation:
In order to calculate Warner's margin of safety ratio, we need to understand what the margin of safety is. The margin of safety measures the difference between a company's actual sales and its break-even point. It indicates how much sales can decline before the company starts incurring losses.
To calculate the margin of safety ratio, we can use the formula:
Margin of Safety Ratio = (Actual Sales - Break-Even Sales) / Actual Sales
In this case, Warner manufacturing reported sales of $2,000,000 (100,000 units at $20 each), and the break-even point was 80,000 units. Plugging these values into the formula, we get:
Margin of Safety Ratio = (2,000,000 - (80,000 * 20)) / 2,000,000
Simplifying this equation gives us a margin of safety ratio of 0.6, or 60%. This means that Warner manufacturing had a 60% cushion in its sales above the break-even point.