The margin of safety is the amount by which sales can decrease before losses are incurred by the company.

Question

BlackTom AI · Accepted Answer

The question asks about the meaning of the margin of safety in managerial accounting.
Option 1: True. The margin of safety is the amount by which current or projected sales can drop before the company incurs a loss, i.e., before sales reach the break-even point. This can be expressed in dollars or as a percentage of sales, and it represents the cushioning effect against unfavorable sales changes.
Option 2: False. This would be incorrect because the margin of safety is not defined as a drop in sales that causes losses, nor as some other unrelated metric. Remember that its purpose is to show how far sales can fall before negative operating income occurs, which is exactly the break-even threshold.
Additional nuance: keep in mind that the margin of safety can be discussed in different forms—dollar amount, unit count, or percentage of sales—but in all cases it measures the distance from break-even to actual or planned sales. It is also distinct from related concepts like operating leverage, which describes how sensitive profits are to a given change in sales, not the buffer itself.
In summary, the statement correctly defines the margin of safety as the amount by which sales can decrease before losses occur, making option True the accurate choice.

ACTG-2300-4 Chapter 5 PreClass Work

The margin of safety is the amount by which sales can decrease before losses are incurred by the company.

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