Which of the following statements is true?

Question

Quizplus · Accepted Answer

This statement is true because the margin of safety represents the difference between the actual level of sales and the breakeven point. Therefore, the higher the margin of safety, the further away the actual level of sales is from the breakeven point, meaning there is a lower risk of a loss if actual sales do not meet expectations. Option A is incorrect because a lower margin of safety means that the company is closer to the breakeven point, which increases the risk of a loss if actual sales do not meet expectations. Option B is incorrect because there is no hard and fast rule for what the margin of safety should be, as it depends on various factors such as the industry and the company's risk tolerance. Option D is incorrect because firms that face highly variable demand conditions would typically desire a higher margin of safety to protect against uncertainty.

Which of the Following Statements Is True