Which of the Following Statements Regarding the Margin of Safety

question 60

Multiple Choice

Which of the following statements regarding the margin of safety is not true?

• A) The margin of safety is the mix between fixed and variable costs.
• B) The margin of safety indicates how much revenue can decrease before reaching the break-even point.
• C) A small margin of safety should motivate managers to reduce costs and increase sales to avoid potential losses.
• D) The margin of safety in units is equal to the actual or estimated units of activity minus units at break-even point.

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Definitions:

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including the cost of the materials and labor directly used to create the product.

Finished Goods

Goods that are finished with production and available for purchase.

Accounts Receivable

The money owed to a company by its customers for products or services that have been delivered but not yet paid for.

Work in Process

Goods in various stages of completion throughout the production process, not yet ready for sale.