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ACCA Applied Skills · Performance Management · Cost-volume-profit analysis (CVP)

On a conventional break-even chart, the margin of safety at a given level of activity is represented by the horizontal distance between:

The margin of safety is the horizontal distance between the break-even point and the budgeted level of activity, because it measures how far sales can fall below budget before the business makes a loss.

  1. AThe break-even point and the budgeted level of activityCorrect
  2. BThe origin and the break-even point
  3. CThe fixed cost line and the total cost line
  4. DThe sales revenue line and the variable cost line

Explanation

Margin of safety is the amount by which budgeted (or actual) sales exceed break-even sales. On the chart this is the gap along the horizontal axis between break-even activity and the budgeted activity. The distance from the origin to break-even is the break-even volume itself, not the margin of safety.

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