Question

Which of the following formulas is used to determine the margin of safety?

A. Budgeted sales in units - Break-even sales in units.
B. Budgeted sales in dollars Break-even sales in dollars.
C. Budgeted sales in units - Break-even sales in units) Budgeted sales in units.
D. All of the formulas will yield a measure of the margin of safety.

Answer 1

The correct formula to determine the margin of safety is option B: Budgeted sales in dollars - Break-even sales in dollars. Margin of safety is a calculation used in business to determine the difference between the budgeted or projected sales and the break-even point.

Step-by-step explanation:

The correct formula to determine the margin of safety is option B: Budgeted sales in dollars - Break-even sales in dollars.

Margin of safety is a calculation used in business to determine the difference between the budgeted or projected sales and the break-even point. The break-even point is the point at which a company's revenue equals its total costs, resulting in neither profit nor loss. By subtracting break-even sales from budgeted sales, the margin of safety can be determined and used as an indicator of how far sales can decrease before the company starts experiencing losses.

For example, if a company has budgeted sales of $100,000 and break-even sales of $60,000, the margin of safety is $40,000 ($100,000 - $60,000).