[amp_mcq option1=”Break Even Point” option2=”Variable Cost” option3=”Fixed Cost” option4=”Margin of Safety E. Angle of Incidence” correct=”option4″]
The correct answer is D. Margin of Safety.
The margin of safety is the amount by which actual sales can fall below break-even sales before a company incurs a loss. It is calculated as a percentage of sales or as a dollar amount.
The P/V ratio is the contribution margin ratio, which is the percentage of sales that is available to cover fixed costs and provide a profit. It is calculated as follows:
P/V ratio = (Sales – Variable costs) / Sales
The profit is the amount of money that a company makes after all of its costs have been paid. It is calculated as follows:
Profit = Sales – Total costs
Therefore, the equation $\frac{{{\text{Profit}}}}{{{\text{P/V Ratio}}}} = .\,.\,.\,.\,.\,.\,.$ can be rewritten as follows:
$\frac{{{\text{Sales – Total costs}}}}{{{\text{Contribution margin ratio}}}} = .\,.\,.\,.\,.\,.\,.$
This equation can be rearranged to solve for the margin of safety as follows:
Margin of safety = Sales – (Total costs / Contribution margin ratio)
The margin of safety is an important measure of a company’s financial health. It indicates how much sales can decline before the company starts to lose money. A high margin of safety indicates that a company is well-positioned to withstand changes in the economy or in its industry.
The other options are incorrect because they are not measures of a company’s financial health.
- Break even point is the point at which a company’s total revenue equals its total costs.
- Variable cost is a cost that changes in proportion to the level of production.
- Fixed cost is a cost that does not change in proportion to the level of production.
- Angle of incidence is the angle between a ray of light and the normal to the surface at the point of incidence.