How can margin of safety be calculated in percentage terms?

The margin of safety is a crucial concept in cost-volume-profit analysis, helping businesses understand how much sales can drop before they reach their breakeven point. To calculate the margin of safety in percentage terms, you take the difference between the current sales level and the breakeven point, divide that by the current sales level, and then multiply by 100 to express it as a percentage.

This calculation reflects the cushion that exists between current sales and breakeven sales, showing how much sales could decrease before the company would start incurring losses. By expressing this difference as a percentage of current sales, businesses can gauge the proportion of sales that exceeds the breakeven sales, providing valuable insight into risk and financial stability.

The other options presented do not accurately calculate the margin of safety in percentage terms or use incorrect components for the formula, making them unsuitable as methods for determining the margin of safety. Thus, the first choice effectively identifies how to calculate the margin of safety in terms that reflect the essential relationship between current sales and the breakeven point.