Question

Break-Even and Margin of Safety Relationships At a recent staff meeting, the management of Boost Technologies Inc. was considering discontinuing the Rocket Man line of electronic games from the product line. The chief financial analyst reported the following current monthly data for the Rocket Man: Units of sales 420,000 Break-even units 472,500 Margin of safety in units 29,400.

For what reason would you question the validity of these data?

Answer 1

• The data provided by chief financial analyst does not make any sense and are wrongly reported.
• This is because:
  Margin of Safety units = Total Sales Units – Break Even sales units, and
  Total Sales units = Break Even sales unit + Margin of Safety units.
• If ‘units’ given by chief financial analyst are put into above equation, the equation would not balance.
• For example, Margin of Safety unit = Total Sales – Break Even sales = 420,000 – 472500 = (52,500) which is illogical.