Needles, Inc.was evaluating its margin of safety.Which one of the following is true?

Question

Quizplus · Accepted Answer

Margin of safety is the difference between actual or projected sales and the break-even point. A higher margin of safety means the company is less vulnerable to potential losses from a decline in sales. This is calculated as a ratio of the difference between actual or projected sales and the break-even point, divided by actual or projected sales. Therefore, a higher ratio indicates a greater margin of safety. Additionally, the break-even point is relevant as it is used to calculate the margin of safety. Option C is incorrect as a higher dollar amount indicates a higher margin of safety, not a lower one. Option D is incorrect as there is no direct correlation between the margin of safety ratio and fixed costs.