Which of the following is the definition of safety margin?

Which of the following is the definition of safety margin?
A . The difference between current or forecasted sales and sales at the break-even point
B . The amount of revenue that remains after subtracting costs directly associated with production
C . The production level at which total revenues for a product equal total expenses
D . The incremental money generated for each product/unit sold after deducting the variable costs

View Answer

Answer: A

Explanation:

As a financial metric, the margin of safety (safety margin) is equal to the difference between current or forecasted sales and sales at the break-even point. The margin of safety is sometimes reported as a ratio, in which the aforementioned formula is divided by current or forecasted sales to yield a percentage value. The figure is used in both break-even analysis and forecasting to inform a firm’s management of the existing cushion in actual sales or budgeted sales before the firm would incur a loss.

This is a question that a student met in her actual exam. The margin of safety is not even mentioned in the CIPS study guide.