Question

If Ivanhoe Company expects to sell 1,250 units of its product at

$14 per unit, and break-even sales for the product are $14,525,
what is the margin of safety ratio?

Answer 1

The margin of safety ratio for Ivanhoe Company is calculated by subtracting the break-even sales from expected sales to find the margin of safety in dollars, which is then divided by the expected sales to find the ratio, resulting in 17%.

Step-by-step explanation:

To calculate the margin of safety ratio, we must first find the margin of safety in dollars and then divide it by the total sales in dollars. The margin of safety in dollars is the difference between actual (or expected) sales and break-even sales.

Here's the step-by-step process:

1. Calculate the expected sales in dollars: 1,250 units × $14/unit = $17,500.
2. Calculate the margin of safety in dollars: $17,500 (expected sales) – $14,525 (break-even sales) = $2,975.
3. Divide the margin of safety by expected sales to find the ratio: $2,975 / $17,500 = 0.17 or 17%.

Hence, the margin of safety ratio for Ivanhoe Company is 17%.