Boosting Sales to Increase Margin of Safety

Steps:

• Margin of safety (MOS) measures how much sales can drop before losses occur: MOS = actual sales - break-even sales.
• Break-even sales = fixed costs ÷ contribution margin ratio (sales price - variable costs per unit ÷ sales price per unit).
• Accepting higher trade discounts lowers variable costs (e.g., materials), raising contribution margin ratio and lowering break-even sales.
• Offering overtime raises labor output, increasing actual sales volume and thus MOS, assuming revenue gain exceeds any overtime cost premium.

Why B is correct:

• Offering overtime increases actual sales in the MOS formula, widening the gap over break-even sales, while forgoing discounts avoids cash flow strain from early payments required for discounts.

Why the others are wrong:

• A: Cost savings from discounts lower break-even but lack sales boost from overtime, yielding minimal MOS gain.
• C: Combined actions increase sales but discounts' cash demands offset overtime benefits, netting no MOS rise.
• D: Higher costs from skipped discounts raise break-even without sales increase, decreasing MOS.

Final answer: B