What does the margin of safety measure?

Question

Quizplus · Accepted Answer

The margin of safety measures how much sales can drop before the firm has an operating loss, providing a cushion for unexpected changes in sales. This is important for companies to know in order to plan for contingencies and avoid losses. Option A is incorrect because the margin of safety does not measure how far prices can be changed, but rather how much sales can drop. Option C is incorrect because the margin of safety measures the level of sales necessary to break even, not how far fixed costs can drop. Option D is incorrect because the margin of safety measures the level of sales necessary to cover both fixed and variable costs, not how far variable costs can rise.

What Does the Margin of Safety Measure