Choice "A" is correct. The margin of safety is the difference between current sales and breakeven sales. Breakeven sales is calculated by dividing fixed costs by the contribution margin ratio:
Breakeven sales
$90,000 / ($120,000 ÷ $200,000)
$90,000 / 0.60$150,000
Margin of safety
$200,000 − $150,000$50,000
Choice "b" is incorrect. The margin of safety is the difference between current sales and breakeven sales. Breakeven sales are $150,000.
Choice "c" is incorrect. The margin of safety is the difference between current sales and breakeven sales. Income taxes are not relevant in determining the margin of safety.Choice "d" is incorrect. The margin of safety is the difference between current sales and breakeven sales.
