Question

Managers can use margin of safety to assess the _______ to the company when there is a possibility of __________ 1. a change in target sales. 2. a large decrease in sales. 3. higher than expected operating income. Making this assessment helps managers:1. accurately calculate a product's contribution margin. 2. choose a realistic target profit.3. make informed decisions.

Answer 1

Managers use margin of safety to assess risks associated with a large decrease in sales and to make informed decisions. Comparing marginal revenue and marginal costs is crucial for determining profit maximizing outputs, where marginal cost calculations indicate profitability of additional production.

Step-by-step explanation:

Managers can use margin of safety to assess the risk to the company when there is a possibility of a large decrease in sales. Making this assessment helps managers make informed decisions, such as choosing a realistic target profit. The concept of margin of safety is linked to understanding how changes in sales volume can impact the financial health of a business. It represents the difference between actual or budgeted sales and the break-even point. When a company compares its marginal revenue with its marginal costs, it is determining the profit maximizing level of output. Marginal cost, calculated by the change in total cost divided by the change in output, plays a vital role in this decision process because it helps a firm evaluate the profitability of producing one more unit.

Answer 2

1. a change in target sales and 2. choose a realistic target profit.

Step-by-step explanation:

When a manager looks into the margin of safety he is seeing the difference between current or forecasted sales and break-even point of sales. If that difference becomes negative, the product becomes unprofitable. That’s why the margin of safety is an important data to use in target sales, with that a manager can adjust accordingly and make a liquid profit from a product or decide to stop producing it.