Question

Which one of the following best describes the margin of safety​?

A. The extent to which the total sales exceeds the total fixed and variable costs
B. The extent to which the total sales exceeds the total variable costs
C. The extent to which the planned volume of sales lies above the​ break-even point
D. The formula​ [Fixed costs/(Sales revenue unit − variable costs per​ unit)]

Answer 1

The margin of safety is the extent to which the planned volume of sales lies above the break-even point, offering a buffer against sales fluctuations and aiding in long-term production planning.

Step-by-step explanation:

The margin of safety is best described as C. The extent to which the planned volume of sales lies above the​ break-even point. The margin of safety indicates how much sales can fall before a business reaches its break-even point, where total revenues equal total costs (both fixed and variable). It provides a buffer for a business against sales fluctuations, allowing for better planning and risk management. The formula given in option D is used to calculate the break-even point rather than the margin of safety itself. Understanding the margin of safety can be crucial for long-term production planning and establishing a profit-maximizing strategy.