Negative Margin of Safety Indicates Operating Losses

Steps:

• Recall margin of safety formula: Actual sales minus break-even sales.
• Determine sign: Positive if sales exceed break-even; negative if below.
• Interpret negative value: Company operates at a loss since fixed costs aren't covered.
• Link to choices: Identify which describes sales below break-even.

Why B is correct:

• Margin of safety is negative when sales fall below break-even point, per standard cost-volume-profit analysis, signaling insufficient revenue to cover costs.

Why the others are wrong:

• A: Describes positive margin of safety, where sales exceed break-even.
• C: Relates to performance against budget, not break-even threshold.
• D: Compares to budget only, ignoring break-even relevance.

Final answer: B