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A Level Accounting (9706)•9706/13/O/N/18
Question 29 from 9706/13/O/N/18

Explanation

Margin of safety as sales buffer to break-even

Steps:

  • Define margin of safety: excess of actual sales over break-even sales.
  • Calculate implication: reduction by this amount equals break-even sales.
  • Apply to question: $10,000 drop in sales reaches break-even point.
  • Confirm: no profit or loss at that level, just zero profit.

Why B is correct:

  • By definition, margin of safety = actual sales revenue - break-even sales revenue; reducing sales by this amount hits break-even, where profit is zero.

Why the others are wrong:

  • A: Margin of safety concerns sales reduction, not profit reduction, to reach break-even.
  • C: Reduction by margin of safety reaches break-even (zero profit), not a loss.
  • D: At break-even after 10,000salesdrop,profitiszero,not10,000 sales drop, profit is zero, not 10,000salesdrop,profitiszero,not10,000.

Final answer: B

Topic: Costs and cost behaviour

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