Question

- The margin of safety is:

a) The difference between estimated sales and breakeven sales.

b) Not a useful measure for management in understanding the risk associated with a product line.

c) The amount sales can drop before the target profit is met.

d) How far sales must increase to earn a profit.

- Which of the following is the amount by which sales could drop before profits reach the breakeven point?

a) Operating leverage

b) Total contribution margin

c) Margin of safety

d) Incremental sales

- The ratio of contribution margin ÷ profit is used to compute a company’s:

a) Expected fixed costs

b) Degree of operating leverage

c) Margin of safety

d) Margin of safety percentage

- What is the relationship between the margin of safety percentage and the degree of operating leverage?

a) They are unrelated

b) They are always the same

c) They are reciprocals

d) They are both subject to management bias

- At the breakeven point:

a) Sales will be equal to variable costs plus target profit

b) Sales will be equal to variable costs plus fixed costs

c) Sales will be equal to fixed costs plus target profit

d) Fixed costs will be equal to variable costs

Answer 1

Q1. Answer is a. The difference between estimated sales and break even sales
Q2. Answer is c. The margin of safety.
Margin of safety represents the sale which could be dropped even then the firm is not at risk.
Q3. Answer is b. Degree of Operating leverage.
Q4. Answer is a. They are unrelated.
Q5. Answer is b. Sales will be equal to variable cost plus fixed cost.
At break even, total sales = total cost