Margin of Safety as Excess Capacity Over Break-Even

Steps:

• Identify the break-even point: units needed to cover all fixed and variable costs.
• Determine budgeted sales units: planned production or sales volume.
• Subtract break-even units from budgeted units to find the buffer against losses.
• This difference shows how much sales can drop before reaching break-even.

Why D is correct:

• Margin of safety formula is budgeted (or actual) sales units minus break-even units, measuring the cushion before losses occur.

Why the others are wrong:

• A: Measures contribution variance, not safety margin.
• B: Compares units without linking to break-even, ignoring profitability threshold.
• C: Focuses on sales shortfall, not excess over break-even.

Final answer: D