Final answer:
The margin of safety is the buffer amount by which sales can drop before a company starts incurring losses, indicating True for the statement. This concept differs from the shutdown point, where a company should consider halting operations if it can't cover variable costs with revenue, even though fixed costs remain.
Step-by-step explanation:
The statement that the margin of safety is the amount by which sales can decrease before losses are incurred by the company is True. The margin of safety represents the difference between the actual sales and the sales at the break-even point, where no profit or loss is incurred. If sales fall below the break-even point, the company will start incurring losses because it won't be able to cover all its fixed costs.
Understanding the shutdown point is crucial for businesses. This is the point where the firm's revenue can no longer cover its variable costs. Below this point, it would be financially better for a company to shut down operations rather than continue to produce at a loss. Fixed costs, which are costs that don't change with the level of production, will still be incurred even if production halts. Thus, the decision to shut down production is influenced by whether the revenue covers the variable costs and contributes to fixed costs.