How is margin of safety defined?

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Multiple Choice

How is margin of safety defined?

Margin of safety is the cushion between what you’re actually selling (or expecting to sell) and the break-even point. It shows how much sales could drop before you would start losing money. You can measure it in dollars with Sales minus Break-even Sales, or as a percentage with (Sales minus Break-even Sales) divided by Sales. The option describing it as the difference between actual or projected sales and break-even sales fits this idea exactly. The ratio of contribution margin to sales is the contribution margin ratio, not the safety cushion. The remaining fixed costs or CVP margin (which is the contribution margin) don’t define the margin of safety.

Margin of safety is the cushion between what you’re actually selling (or expecting to sell) and the break-even point. It shows how much sales could drop before you would start losing money. You can measure it in dollars with Sales minus Break-even Sales, or as a percentage with (Sales minus Break-even Sales) divided by Sales. The option describing it as the difference between actual or projected sales and break-even sales fits this idea exactly. The ratio of contribution margin to sales is the contribution margin ratio, not the safety cushion. The remaining fixed costs or CVP margin (which is the contribution margin) don’t define the margin of safety.

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