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The margin of safety in dollars is:

A. Costs at break-even minus expected profit.
B. Expected sales minus expected profit.
C. Expected sales minus sales at break-even.
D. Expected costs minus costs at break-even.
E. Expected profit minus actual profit.

Answer :

Final answer:

The margin of safety in dollars is established by subtracting sales at break-even from expected sales. This measure provides an overview of how much sales can decrease before a company begins to incur losses. Hence, it's a significant aspect of risk management in business.

Explanation:

Margin of Safety Concept

To answer your question, the margin of safety in dollars is 'expected sales minus sales at break-even'. Essentially, the margin of safety tells you the extent to which a company's sales could decrease before it would start incurring losses. It provides a buffer for unexpected fluctuations in business operations and indicates the strength of a business in adverse conditions.

Consider this example: Your total expected sales are $125 (five units at $25/unit) while your total expected costs at break-even are $130, and the firm is operating at a loss of $5 due to costs exceeding sales. If this business were to continue operating with these current economic conditions, it would continue to operate at a loss.

Therefore, they would need to reduce their production quantity or increase their selling price to achieve a positive margin of safety.The margin of safety can help you understand how much sales can decline before reaching the break-even point and provides valuable insight for risk management in business.

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