The margin of safety tells managers:
A)how much sales would have to increase to hit the target profit.
B)how much profit would drop if sales decreased.
C)how much sales could drop before the firm no longer earns profits.
D)how much profit would have to increase to hit target sales.

Question

Quizplus · Accepted Answer

The margin of safety is the amount by which sales can drop before the company starts to incur losses. It tells managers how much sales they can afford to lose and still maintain profitability. Therefore, choice C is the best answer. The other choices do not accurately describe the margin of safety.

The Margin of Safety Tells Managers