Margin of Safety in Break-Even Analysis

Steps:

• Identify total sales revenue (e.g., $100,000).
• Calculate break-even sales (fixed costs divided by contribution margin ratio, e.g., $40,000).
• Subtract break-even sales from total sales ($100,000 -$40,000).
• Result is margin of safety ($60,000).

Why D is correct:

• Margin of safety equals actual sales minus break-even sales, yielding $60,000 per the formula.

Why the others are wrong:

• A: Understates by ignoring full sales excess over break-even.
• B: Miscalculates partial buffer, not matching total difference.
• C: Equals break-even point, not the safety margin above it.

Final answer: D