Question

A margin of safety of 30% means that every dollar in revenue generated thirty cents in profit.

A.True
B. False

Answer 1

B) False

Step-by-step explanation:

Margin of safety measures the percentage difference between actual sales and break even sales.

Margin of safety acts like a buffer zone that the Company can lose before it stops making profits.

Margin of safety is calculated as follows:

Margin of Safety = (Current sales - break even sales) / Current sales

30% margin of safety indicates that the Company can bear to lose 30% of its sales before it reaches to break even level.

Net profit margin of 30% shows that every dollar of sales earns 30 cents in profit.