Asked by Hannah Neighbors on Jul 04, 2024
Verified
The margin of safety is equal to:
A) Sales - Net income.
B) Sales - (Variable expenses + Fixed expenses) .
C) Sales - (Variable expenses/Contribution margin) .
D) Sales - (Fixed expenses/Contribution margin ratio) .
Margin Of Safety
The excess of budgeted (or actual) dollar sales over the break-even dollar sales.
Variable Expenses
Expenses that fluctuate based on the level of a company's operations.
Fixed Expenses
Costs that do not change with the level of production or sales, such as rent, salaries, and insurance premiums.
- Calculate and interpret the margin of safety and its significance in business decision-making.
Verified Answer
LS
Lauren SilvaJul 09, 2024
Final Answer :
D
Explanation :
The margin of safety is the difference between actual or projected sales and the sales at the break-even point. Therefore, it can be calculated as the amount of sales above the break-even point. The break-even point can be determined either by using the equation method or the contribution margin method. The contribution margin method divides the total fixed expenses by the contribution margin ratio, which is the contribution margin divided by sales. Therefore, the margin of safety can be calculated as Sales - (Fixed expenses/Contribution margin ratio).
Learning Objectives
- Calculate and interpret the margin of safety and its significance in business decision-making.