The correct answer is C. Both 1 and 2.
Margin of safety is the amount of sales revenue that a company can lose before it incurs a loss. It is calculated by subtracting the break-even point from the current sales revenue.
The break-even point is the point at which a company’s total revenue equals its total costs. It is calculated by dividing the fixed costs by the contribution margin per unit.
The contribution margin is the amount of revenue that a company keeps after paying for variable costs. It is calculated by subtracting the variable costs from the sales revenue.
A lower break-even point means that a company has a higher margin of safety. This is because a lower break-even point means that the company can lose more sales revenue before it incurs a loss.
A better profitable product mix means that a company is selling more of its high-margin products and less of its low-margin products. This also leads to a higher margin of safety, because the company is keeping more of its revenue after paying for variable costs.
Therefore, both lowering the break-even point and adopting a better profitable product mix will improve a company’s margin of safety.