Which of the following is the correct formula to calculate the margin of safety from a break-even chart?

Answer options:

Break-even output + planned (or actual) output

Break-even output / planned (or actual) output

Planned (or actual) output – break-even output

Planned (or actual) output – total costs

How to approach this question

Recall the definition of "margin of safety". It represents the "cushion" or amount by which sales can drop before the company reaches its break-even point. This implies a subtraction. The formula must therefore be the current level of sales minus the break-even level of sales.

Full Answer

C.Planned (or actual) output – break-even output✓ Correct

The correct answer is C. The margin of safety is the difference between the actual or planned level of output and the break-even output. It shows how much sales can fall before the business starts making a loss.

The margin of safety is a key concept in break-even analysis. It is calculated as: Margin of Safety = Actual (or Budgeted) Sales - Break-even Sales. It tells a business how much of a drop in sales it can withstand before it will start to incur losses. A higher margin of safety indicates a lower risk of breaking even.

Common mistakes

✗ Mixing up the terms in the formula, for example, subtracting planned output from break-even output. ✗ Confusing output (units) with costs (money).

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Which of the following is the correct formula to calculate the margin of safety from a break-even chart?

How to approach this question

Full Answer

Common mistakes

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