Question

Margin of safety in dollars is

A) expected sales divided by break-even sales.
B) expected sales less break-even sales.
C) actual sales less expected sales.
D) expected sales less actual sales.

Answer 1

The margin of safety in dollars is obtained by deducting the break-even sales from the expected sales, indicating the buffer range above the break-even point.

Step-by-step explanation:

The margin of safety in dollars is calculated by taking the expected sales and subtracting the break-even sales. The break-even point is where a firm's revenue equals its total costs, allowing for the determination of no profit or loss. When a company's actual operations result in sales above the break-even point, a margin of safety exists, indicating the extent to which sales can drop before the firm reaches the break-even point again. It is important for a business to maintain sales above the average variable cost to remain operational. If the firm cannot cover average variable costs, it faces a decision to either continue operating at a loss or shut down, with the 'best' choice being the option that incurs the least amount of losses.