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Business Strategy and Accounting Basics

Which is the margin of safety ratio of a company with sales of ¥200 million, a variable cost ratio of 70% and fixed costs of ¥45 million?

  1. A25%
  2. Babout 33%
  3. C75%
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Answer: A. 25%

The contribution margin ratio is 1 − 0.7 = 0.3, so break-even sales are 45 ÷ 0.3 = ¥150 million. The margin of safety ratio expresses how far current sales exceed the break-even point as a share of sales: (200 − 150) ÷ 200 = 25%. It means the company does not fall into a loss until sales drop by 25%, and the larger it is, the more resistant the company is to falling sales. Break-even sales ÷ sales = 75% is the break-even ratio, and the two add up to 100%.

  • A. Correct. It is (sales − break-even sales) ÷ sales.
  • B. This divides the difference between sales and break-even sales (¥50 million) by break-even sales instead of by sales.
  • C. This is the break-even ratio, break-even sales ÷ sales. The margin of safety ratio is 1 − break-even ratio.
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