Asked by Andrew Oriold on May 29, 2024
Verified
Which of the following statements about the safety margin is correct?
i. All else being equal, the safety margin is higher when the break even point is lower.
Ii The safety margin depends on the budgeted revenue
Iii The safety margin is unaffected by fixed cost.
A) i and ii
B) i and iii
C) ii and iii
D) All three statements are correct
Safety Margin
The difference between the actual level of sales or production and the break-even point, measuring the cushion a company has before it incurs losses.
Break Even Point
The financial analysis term where total revenues equal total expenses, and there is no profit or loss.
Budgeted Revenue
The amount of income that a company plans or expects to generate over a certain period, often used for planning and performance evaluation purposes.
- Compute the margin of safety and comprehend its importance.
Verified Answer
JM
Jolene MaciasJun 02, 2024
Final Answer :
A
Explanation :
i. The safety margin, which measures how much sales can drop before a business reaches its break-even point, is indeed higher when the break-even point is lower, assuming other factors remain constant. This is because a lower break-even point means a business needs to generate less revenue to cover its costs, thus providing a larger buffer before losses occur.ii. The safety margin does depend on budgeted revenue since it's calculated based on the difference between actual or projected sales and the sales level at the break-even point. Changes in budgeted revenue directly affect the safety margin.
Learning Objectives
- Compute the margin of safety and comprehend its importance.