The margin of safety
A) equals break-even unit sales less actual unit sales.
B) shows how far sales can fall below the planned level before losses occur.
C) is the sales price minus all the variable expenses.
D) is the same as break-even point.

Question

Quizplus · Accepted Answer

The margin of safety shows how much sales can decrease before the company incurs losses, indicating the level of buffer available. Thus, option B is the correct choice. Option A is incorrect because it represents the difference between the expected or break-even unit sales and actual unit sales, whereas it has no relation to the margin of safety. Option C is incorrect because it calculates the contribution margin, not the margin of safety. Option D is incorrect because break-even point signifies the sales level where the company generates zero profit or loss, whereas the margin of safety refers to the difference between the actual or planned sales and the break-even point.

The Margin of Safety