Cost Accounting Quiz: Margin Of Safety
20 questions · exam conditions
0:00
Margin Of SafetyQuestion 1 of 20

DOL is 4 and current sales are 10,000 units. Margin of safety in units?

5,000 units
2,000 units
7,500 units
2,500 units
← Back to quizzes

Cost Accounting Quiz

Cost Accounting Quiz: Margin Of Safety

Practice Margin Of Safety in Cost Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Margin Of Safety, giving you a quick way to practice the rules, question types, and explanations that matter most for Cost Accounting.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

DOL is 4 and current sales are 10,000 units. Margin of safety in units?

  1. 5,000 units
  2. 2,000 units
  3. 7,500 units
  4. 2,500 units (correct answer)
Explanation: DOL equals current sales units divided by margin of safety in units. So with DOL of 4 and 10,000 units, margin of safety = 10,000 / 4 = 2,500 units. The tempting 7,500 is the breakeven point, not the margin of safety.

Question 2

Keystone Co. sells two products, Alpha and Beta. Keystone sells three units of Alpha for every two units of Beta. Fixed costs are ($336,000). Product data is as follows:

  • Alpha: Price ($100), Variable Cost ($60)
  • Beta: Price ($150), Variable Cost ($90)

Using the information from the Keystone Co. passage, if total sales are projected to be 10,000 units, what is the margin of safety in dollars?

  1. ($840,000)
  2. ($360,000) (correct answer)
  3. ($144,000)
  4. ($1,200,000)
Explanation: First, determine the weighted-average contribution margin (CM) per 'bundle' of 3 Alphas and 2 Betas. Alpha's CM is ($40) and Beta's is ($60). The bundle CM is ((3 * 40)+(2∗40) + (2 * 60) = 120+120 + 120 = 240\). The break-even point in bundles is \(336,000 / 240 = 1,400\) bundles. This equals 4,200 units of Alpha (1,400*3) and 2,800 units of Beta (1,400*2). Projected sales are 6,000 Alphas (10,000*3/5) and 4,000 Betas (10,000*2/5). The margin of safety in units is 1,800 Alphas (6,000-4,200) and 1,200 Betas (4,000-2,800). In dollars, this is \((1,800 * 100) + (1,200 * 150)=150) = 180,000 + 180,000=180,000 = 360,000).

Question 3

Breakeven sales $240,000, MOS 25%, CM ratio 35%. Net operating income?

  1. $80,000
  2. $28,000 (correct answer)
  3. $112,000
  4. $84,000
Explanation: A 25% margin of safety means breakeven sales are 75% of actual sales, so actual sales are 240,000 / 0.75 = 320,000. Contribution margin is 320,000 × 35% = 112,000. Fixed costs equal breakeven sales × CM ratio = 240,000 × 35% = 84,000, so net operating income is 112,000 - 84,000 = 28,000. The tempting $84,000 is just fixed costs, not net income.

Question 4

Sales $500,000, VC $300,000, FC $150,000. Margin of safety percentage?

  1. 10%
  2. 30%
  3. 25% (correct answer)
  4. 40%
Explanation: Contribution margin is 500,000 - 300,000 = 200,000, so the CM ratio is 40%. Break-even sales revenue is fixed costs / CM ratio = 150,000 / 0.40 = 375,000. Margin of safety is 500,000 - 375,000 = 125,000, and as a percentage of actual sales that is 125,000 / 500,000 = 25%. The tempting 40% is the contribution margin ratio, not the margin of safety.

Question 5

Current sales revenue $800,000, MOS 30%, CM ratio 50%. Fixed costs?

  1. $240,000
  2. $280,000 (correct answer)
  3. $400,000
  4. $560,000
Explanation: At a 30% margin of safety, break-even sales are 70% of 800,000 = 560,000. At break-even, contribution margin equals fixed costs, and CM ratio is 50%, so fixed costs = 50% of 560,000 = 280,000. The tempting 240,000 is just 30% of sales revenue, the margin of safety in dollars, not fixed costs.

Question 6

Sales $600,000, VC $360,000, FC $120,000. Margin of safety in dollars?

  1. $120,000
  2. $240,000
  3. $360,000
  4. $300,000 (correct answer)
Explanation: Contribution margin is 600,000 - 360,000 = 240,000, so the CM ratio is 240,000 / 600,000 = 0.4. Break-even sales are 120,000 / 0.4 = 300,000. Margin of safety is actual sales minus break-even sales: 600,000 - 300,000 = 300,000. The tempting 240,000 is just the contribution margin, not the margin of safety.

Question 7

Price $40, VC $25, FC $90,000, budget 8,000 units. Price rises 10%. New MOS in units?

  1. 2,000 units
  2. 4,737 units
  3. 3,263 units (correct answer)
  4. 6,000 units
Explanation: New price is 44, so contribution margin is 44 - 25 = 19 per unit. Breakeven sales are 90,000 / 19 = 4,737 units. Margin of safety is 8,000 - 4,737 = 3,263 units. The tempting error is using the old price of 40, which gives breakeven of 6,000 and a margin of 2,000 units.

Question 8

Price $50, VC $30, FC $60,000, budgeted sales 4,000 units. Margin of safety in dollars?

  1. $50,000 (correct answer)
  2. $60,000
  3. $150,000
  4. $200,000
Explanation: Each unit contributes 50 - 30 = 20 toward fixed costs, so breakeven is 60,000 / 20 = 3,000 units. Budgeted sales are 4,000 units, giving a 1,000-unit margin of safety. At $50 per unit, that is 1,000 x 50 = $50,000. A tempting wrong answer is $150,000, but that is breakeven sales dollars, not the margin of safety.

Question 9

FC $210,000, price $50, VC $35. Desired MOS 30% of sales. Required sales units?

  1. 20,000 units (correct answer)
  2. 14,000 units
  3. 18,200 units
  4. 46,667 units
Explanation: Contribution margin per unit is 50 - 35 = 15, so break-even units are 210,000 / 15 = 14,000. With a 30% margin of safety, break-even units are 70% of sales: 14,000 = 0.70Q, so Q = 14,000 / 0.70 = 20,000. Avoid multiplying break-even by 1.30 to get 18,200; break-even must be 70% of sales, not 30% above break-even.

Question 10

CM ratio 40%, FC $120,000, operating income $30,000. Margin of safety percentage?

  1. 32%
  2. 25%
  3. 20% (correct answer)
  4. 40%
Explanation: Contribution margin = fixed costs + operating income = 120,000 + 30,000 = 150,000. Sales = 150,000 / 0.40 = 375,000. Breakeven sales = 120,000 / 0.40 = 300,000. Margin of safety = (375,000 - 300,000) / 375,000 = 20%. The tempting 25% comes from dividing operating income by fixed costs, which is not the margin of safety.

Question 11

Price $20, VC $12, FC $80,000. Planned 12,000 units; fixed costs rise 20%. MOS units?

  1. 2,000 units
  2. 2,400 units
  3. 7,200 units
  4. Zero units (correct answer)
Explanation: Contribution margin per unit is 20 - 12 = 8. Fixed costs rise 20%, from 80,000 to 96,000, so break-even is 96,000 / 8 = 12,000 units. Planned volume is also 12,000 units, so margin of safety is 12,000 - 12,000 = 0 units. The tempting 2,000 units comes from using old fixed costs of 80,000, but the increase must be included.

Question 12

Sales are $500,000; variable costs 60% of sales; fixed costs $150,000. Sales fall 20%. Margin of safety in dollars?

  1. $125,000
  2. $100,000
  3. $25,000 (correct answer)
  4. $10,000
Explanation: After a 20% fall, sales are 400,000. Variable costs are 60% of sales, so the contribution margin ratio is 40%; fixed costs of 150,000 divided by 0.40 gives breakeven sales of 375,000. Margin of safety is 400,000 minus 375,000 = 25,000. The tempting 125,000 is the margin before the sales decline, so recalculate with the new sales level.

Question 13

Price $50, variable cost $30, fixed costs $240,000, sales 15,000 units. Fixed costs rise 20%. Margin of safety in units?

  1. 14,400 units
  2. 600 units (correct answer)
  3. 3,000 units
  4. 12,000 units
Explanation: Contribution per unit is 50 - 30 = 20. Fixed costs rise 20%, so they become 240,000 x 1.2 = 288,000. Break-even is 288,000 / 20 = 14,400 units. Margin of safety is sales minus break-even: 15,000 - 14,400 = 600 units. The 3,000-unit trap comes from using the old fixed costs of 240,000 and forgetting the 20% increase.

Question 14

Breakeven sales are $600,000; margin of safety is 20% of actual sales. What is the margin of safety in dollars?

  1. $120,000
  2. $750,000
  3. $600,000
  4. $150,000 (correct answer)
Explanation: Margin of safety equals actual sales minus breakeven sales and is 20% of actual sales. Let actual sales be S: S - 600,000 = 0.20S, so 0.80S = 600,000 and S = 750,000. Then margin of safety = 0.20 x 750,000 = 150,000. The tempting wrong $120,000 is 20% of breakeven, but the percent applies to actual sales.

Question 15

Margin of safety is 25% of sales; fixed costs are $135,000; CM ratio is 45%. What is the margin of safety in dollars?

  1. $45,000
  2. $60,750
  3. $33,750
  4. $100,000 (correct answer)
Explanation: Break-even sales equals fixed costs divided by CM ratio: 135,000 / 0.45 = 300,000. If margin of safety is 25% of sales, break-even sales must be 75% of sales, so total sales are 300,000 / 0.75 = 400,000. Margin of safety is 25% of that, or 100,000. The trap is multiplying 135,000 by 45% to get 60,750, which misuses fixed costs.

Question 16

Sales are $800,000; CM ratio is 40%; fixed costs are $250,000. If CM ratio drops to 30%, margin of safety percentage?

  1. -4.17% (correct answer)
  2. 0.00%
  3. -1.25%
  4. 21.88%
Explanation: With the new CM ratio of 30%, breakeven sales are 250,000 / 0.30 = 833,333. Margin of safety is (800,000 - 833,333) / 800,000 = -33,333 / 800,000 = -4.17%. The tempting mistake is to keep the old 40% ratio, which gives 21.88%, but the CM ratio has dropped to 30%.

Question 17

A financial analyst notes that a company's margin of safety has decreased significantly from the prior year, although sales revenue has remained constant. Which of the following is the most likely cause?

  1. The selling price per unit has increased.
  2. The variable cost per unit has increased. (correct answer)
  3. Total fixed costs have decreased.
  4. The sales mix shifted to a more profitable product.
Explanation: The margin of safety equals Sales - Break-Even Sales. If sales are constant and the margin of safety decreases, the break-even point must have increased. The break-even point (BEP) is calculated as Fixed Costs / Contribution Margin Ratio. The BEP increases if fixed costs increase or the contribution margin (CM) ratio decreases. An increase in variable cost per unit would decrease the CM ratio, thus increasing the break-even point and decreasing the margin of safety.

Question 18

Two companies, Altair Inc. and Vega Corp., have identical sales revenue and operating income. Altair has higher fixed costs and a higher contribution margin ratio than Vega. Which of the following statements is correct regarding their margin of safety?

  1. Altair has a higher margin of safety in dollars.
  2. Vega has a higher margin of safety in dollars. (correct answer)
  3. Their margins of safety in dollars are identical.
  4. The relationship cannot be determined without knowing unit sales data.
Explanation: Operating Income = Margin of Safety (($)) * Contribution Margin Ratio. Since both companies have the same operating income, the company with the lower contribution margin ratio must have a higher margin of safety in dollars to yield the same income. Vega has a lower contribution margin ratio, so it must have a higher margin of safety in dollars. Altair's high fixed costs and high CM ratio mean it has higher operating leverage and is riskier, which corresponds to a lower margin of safety.

Question 19

Apex Industries sells a single product for ($120) per unit. Variable costs are ($75) per unit, and annual fixed costs are ($270,000). If Apex projects sales of 8,000 units for the upcoming year, what is its margin of safety percentage?

  1. 25.0% (correct answer)
  2. 33.3%
  3. 75.0%
  4. 9.4%
Explanation: First, calculate the contribution margin per unit: (120−120 - 75 = 45\). Next, determine the break-even point in units: Fixed Costs / Contribution Margin per Unit = \(270,000 / 45 = 6,000\) units. The margin of safety in units is the difference between projected sales and break-even sales: 8,000 - 6,000 = 2,000units.Finally,themarginofsafetypercentageisthemarginofsafetyinunitsdividedbyprojectedsalesinunits:units. Finally, the margin of safety percentage is the margin of safety in units divided by projected sales in units:(2,000 / 8,000) = 25.0%$.

Question 20

Nova Manufacturing plans to sell 15,000 units of its product at ($50) per unit. Current variable costs are ($30) per unit, and total fixed costs are ($180,000). Management believes that a new production process can decrease variable costs by 10%. If this change is implemented, what will be the new margin of safety in units?

  1. 6,000 units
  2. 7,174 units (correct answer)
  3. 7,826 units
  4. 1,174 units
Explanation: First, calculate the new variable cost: (30∗(1−0.10)=30 * (1 - 0.10) = 27) per unit. The new contribution margin is (50−50 - 27 = 23\) per unit. Next, calculate the new break-even point in units: \(180,000 / 23 ≈ 7,826\) units. The new margin of safety in units is the difference between planned sales and the new break-even point: 15,000 - 7,826 = 7,174$ units.