CAIE IGCSE Business Studies 7.2.8 margin of safety

Practise margin-of-safety questions by subtracting break-even output from actual output and interpreting the spare sales level.

Exam points

Define margin of safety as current output or sales minus break-even output.
Calculate the gap, such as actual output 225 minus break-even output 125.
Show method clearly so follow-through marks can be awarded from earlier break-even work.

[Maximum number: 2]

GHT is a public limited company. It produces steel products including gates and garage doors. GHT has a flat organisational structure and a short chain of command. GHT has many stakeholder groups including 600 employees. The Managing Director is considering introducing job rotation to improve employee motivation. He has also been analysing some financial data. An extract is shown in Table 3.1.

Table 3.1

Calculate the margin of safety for product X in 2020.

Show your working.

Correct method:
$\text{margin of safety} =\text{current output}-\text{break-even output} =30\,000-22\,500 =7500\text{ units}$

Award 2 marks for the correct answer. Award 1 mark for the correct method with an incorrect answer.

Award only 1 mark if 7500 appears in the working but is not given as the final answer. If a dollar sign is attached to the answer, award only 1 mark because this is not a financial value.

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7.2.8—Margin of safety question 1