What formula calculates the margin of safety in dollars?
A) expected sales - expected profit
B) expected sales - sales at break-even
C) expected costs - costs at break-even
D) costs at break-even - expected profit

Question

Quizplus · Accepted Answer

The margin of safety in dollars is calculated by subtracting the sales at break-even point from the expected sales. This is because the sales at break-even represent the minimum level of sales required to cover all costs and achieve zero profit, so any sales in excess of this represent the margin of safety. Option A is incorrect as it subtracts the expected profit from expected sales, which is not the correct way to calculate the margin of safety. Option C is incorrect as it subtracts the costs at break-even from expected costs, which is also not the correct way to calculate the margin of safety. Option D is incorrect as it subtracts the expected profit from the costs at break-even, which is not relevant to the margin of safety calculation.

What Formula Calculates the Margin of Safety in Dollars