Discussion
For that firm at 20 000 units, the margin of safety is
Answer: B
Correct answer: 5000 units, or 25 per cent of sales
The margin of safety is the excess over break-even:
\[ 20\,000 - 15\,000 = 5000 \ \text{units}, \quad \frac{5000}{20\,000} = 25\% \]Sales could therefore fall by a quarter before the firm began to lose money. Twenty-five per cent is a moderate cushion; a firm with high fixed costs and a narrow margin is the one to worry about in a downturn.
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