Margin of Safety Measures Sales Cushion Above Break-Even

Steps:

• Recall margin of safety formula: Actual sales minus break-even sales.
• Positive margin means actual sales exceed break-even point.
• Break-even sales equal fixed costs divided by contribution margin per unit.
• Compare actual sales to break-even to determine if margin is positive.

Why A is correct:

• Definition states positive margin of safety arises when actual sales surpass break-even sales, providing a buffer against losses.

Why the others are wrong:

• B: Compares actual to budgeted sales, indicating sales variance, not margin of safety.
• C: Implies actual sales below break-even, resulting in negative margin of safety.
• D: Shows unfavorable sales performance versus budget, unrelated to break-even.

Final answer: A