Asked by Julian Jones on May 19, 2024
Verified
If a business had sales of $4,000,000 and a margin of safety of 25%, the break-even point was
A) $5,000,000
B) $3,000,000
C) $12,000,000
D) $1,000,000
Margin of Safety
The difference between actual or expected sales and the sales level at which the business incurs no profit or loss.
Break-even Point
The point at which total costs and total revenue are equal, meaning there is no net loss or gain, and the business is just covering its costs.
- Determine the safety margin and its importance in evaluating risks.
Verified Answer
KJ
Kerine JohnsonMay 23, 2024
Final Answer :
B
Explanation :
Margin of safety is the amount of sales above the break-even point. If the margin of safety is 25%, it means that sales are 125% of the break-even sales. So, the break-even sales are $4,000,000/1.25 = $3,200,000. Therefore, the break-even point is $3,200,000, which is closest to option B, $3,000,000.
Learning Objectives
- Determine the safety margin and its importance in evaluating risks.