Question

A company's margin of safety in sales dollars is $80,000. What does this mean?

	A.	The company's sales are $80,000 above the operating leverage.
	B.	The company's profit is $80,000 above the last period's profit.
	C.	The company's sales are $80,000 above the break-even point sales.
	D.	The company's profit is $80,000 above the target profit.

Answer 1

Answer: C) The company's sales are $80,000 above the break-even point sales

Explanation:

Margin of Safety sales is the company's sales over and above the break-even sales. It is the margin by which company's sales exceeds the breakeven sales

Formula to compute Margin of Safety Sales is:

   Margin of Safety Sales = Actual Sales - Break-even Sales

It is the measure of excess of company's sales over break-even sales

For example

Let Company sales be $100,000

Break-even sales be $20,000

Then Margin of Safety Sales = Actual Sales - Break-even Sales

= 100,000 - 20,000

= $80,000

It means company;s Sales ($100,000) is $80,000 (Margin of safety) more than the break-even sales ($20,000)