Define the term 'margin of safety'.

Mark scheme

Marking points from the official mark scheme (May/June 2018). The mark or mark type is shown in brackets.

1. [2] The amount by which the sales level exceeds the break-even level of output
2. [2] OR an indication of how much sales could fall without the business falling into loss
3. [2] OR the difference between the actual output and the break-even level of output
4. [2] OR actual/budgeted sales – break-even sales.
5. [1] The amount by which a business has passed its break-even level.
6. [Point] It is supply side only (costs).
7. [Point] It tells you nothing about what sales are actually likely to be for the product at various prices.
8. [Point] Not all costs can be conveniently classified into fixed and variable costs.
9. [Point] It assumes that fixed costs are constant/they can increase
10. [Point] Variable costs do not always stay the same.
11. [Point] Sales are unlikely to be the same as predicted output.
12. [Point] Break-even analysis assumes all output is sold.
13. [Point] There is likely to be some build-up of stock and/or wasted output.
14. [Point] Assumes external environment is stable.
15. [Point] Depends on accuracy of data – it is only a forecast.
16. [Point] It is only useful for one product.