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CIMA E1 study materials
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CIMA E1 practice questions

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Question 1E1 (Operational level subject)

Under CIMA's definition, which activity best illustrates 'management accounting' rather than 'financial accounting'?

  1. Preparing a budget for next year's production department Correct answer.
  2. Publishing annual audited statements for shareholders
  3. Calculating the statutory tax payable to the tax authority
  4. Recording last month's sales in the general ledger

Explanation

Management accounting produces information for internal managers to plan, control and make decisions, and it is forward-looking and unregulated in format. Financial accounting reports the past performance of the whole entity to external stakeholders under statutory rules. Budgeting for a future period is therefore a management accounting activity.

Question 2E1 (Operational level subject)

In CIMA's structure, which level must a candidate complete before attempting the Strategic level?

  1. Operational level
  2. Certificate level
  3. Management level Correct answer.
  4. Professional experience portfolio

Explanation

The CIMA qualification is structured as Certificate, Operational, Management, Strategic and then the practical experience requirement. The Management level sits immediately before Strategic, so it must be completed first. The experience portfolio runs alongside study rather than gating progression to Strategic.

Question 3E1 (Operational level subject)

A finance function separates the duties of authorising payments from reconciling the bank account. Which internal control objective does this primarily serve?

  1. Reducing the cost of the external audit
  2. Ensuring compliance with tax legislation
  3. Improving the accuracy of management forecasts
  4. Safeguarding assets and preventing fraud Correct answer.

Explanation

Segregation of duties is a preventive control that stops one person from both initiating and concealing a transaction, which protects assets from error and fraud. The other options may be side benefits, but they are not the primary control objective being addressed by splitting authorisation from reconciliation.

Question 4E1 (Operational level subject)

Which element of a business's micro-environment is represented by a newly opened competitor offering lower prices in the same town?

  1. A rival in the competitive environment Correct answer.
  2. A stakeholder in the internal environment
  3. A trend in the macro-environment
  4. A supplier in the value chain

Explanation

The competitive environment covers direct rivals and the intensity of competition that the entity faces immediately. A new local price-cutting competitor sits squarely in that layer. Suppliers, macro trends and internal stakeholders are different layers of the environmental analysis.

Question 5E1 (Operational level subject)

Which statement correctly describes the relationship between corporate governance and the board of directors?

  1. The board delegates all governance to the external auditor
  2. The board is accountable for directing and controlling the company Correct answer.
  3. The board exists only to prepare the financial statements
  4. The board reports exclusively to the finance director

Explanation

Corporate governance is the system by which companies are directed and controlled, and the board carries that responsibility on behalf of shareholders. It sets strategy, oversees management and ensures accountability. Auditors, financial statements and the finance director are supporting elements, not the seat of governance.

Question 6E1 (Operational level subject)

Which of the following is an example of a 'hard' control in an organisation?

  1. An automated system that blocks payments above a limit Correct answer.
  2. A staff training programme on values
  3. A shared culture of ethical behaviour
  4. A manager's informal coaching of a junior

Explanation

Hard controls are formal, documented and enforced by systems or rules, such as automated authorisation limits. Soft controls rely on culture, values, leadership and informal influence. The other options describe soft controls that shape behaviour indirectly.

Question 7E1 (Operational level subject)

A company's code of ethics states that employees must not accept gifts above a token value from suppliers. Which purpose does this rule most directly serve?

  1. Improving the accuracy of inventory valuation
  2. Managing conflicts of interest and bribery risk Correct answer.
  3. Reducing the entity's corporation tax liability
  4. Maximising short-term supplier discounts

Explanation

Gift limits are an integrity control designed to prevent personal interest from influencing procurement decisions and to reduce bribery exposure. They protect objectivity in decision-making. Inventory valuation, tax and discount maximisation are unrelated financial outcomes.

Question 8E1 (Operational level subject)

Which cost classification describes a payment that does not change in total when output rises within the relevant range?

  1. Marginal cost
  2. Fixed cost Correct answer.
  3. Semi-variable cost
  4. Variable cost

Explanation

A fixed cost remains constant in total over the relevant range of activity, although it falls per unit as output rises. Variable and marginal costs change with volume, and semi-variable costs contain both elements. The defining feature here is constancy in total.

Question 9E1 (Operational level subject)

A manager uses a report showing actual versus budgeted expenditure by responsibility centre to investigate overspends. Which management function is being performed?

  1. Motivating
  2. Planning
  3. Control Correct answer.
  4. Decision-making

Explanation

Control involves comparing actual performance with the plan, identifying variances and taking corrective action. The manager is measuring performance against budget and investigating differences, which is the control cycle in action. Planning sets the budget in advance, while motivation and decision-making are different functions.

Question 10E1 (Operational level subject)

An organisation's finance team is restructured so that transactional processing is centralised in a shared service centre while business partnering is embedded in operating units. What is the main intended benefit?

  1. Combining efficiency in transaction processing with better decision support Correct answer.
  2. Eliminating the need for internal controls
  3. Removing the requirement for external audit
  4. Shifting all risk to the shared service centre

Explanation

Modern finance function design separates efficient, standardised transaction processing from forward-looking business partnering close to operations. This delivers cost efficiency and scale in processing while improving the relevance of finance advice to managers. Controls and audit requirements remain in place.

Question 11E1 (Operational level subject)

A company wants to assess the attractiveness of entering a new industry. Which analytical tool is specifically designed to examine competitive forces such as buyer power and threat of substitutes?

  1. A variance analysis report
  2. A cash flow forecast
  3. The BCG growth-share matrix
  4. Porter's five forces framework Correct answer.

Explanation

Porter's five forces framework analyses the competitive intensity of an industry through buyer power, supplier power, rivalry, substitutes and new entrants. It is used to judge industry attractiveness before entry. The BCG matrix, variance analysis and cash forecasts address different questions.

Question 12E1 (Operational level subject)

Which of the following best describes the purpose of the UK Corporate Governance Code for listed companies?

  1. To prescribe detailed accounting entries for revenue
  2. To set principles of good board leadership and accountability on a comply-or-explain basis Correct answer.
  3. To replace the role of the audit committee
  4. To guarantee a minimum dividend to shareholders

Explanation

The UK Corporate Governance Code sets out principles of good governance, including board leadership, effectiveness, accountability and remuneration, applied through comply-or-explain reporting. It does not prescribe accounting entries, dividends or remove board committees. It shapes behaviour rather than dictating financial outcomes.

Question 13E1 (Operational level subject)

An employee discovers that a senior manager is approving invoices from a company owned by a relative. Which course of action best reflects a professional ethical framework?

  1. Leak the information to a local newspaper immediately
  2. Confront the manager publicly in a team meeting
  3. Raise the concern through the organisation's whistleblowing channel Correct answer.
  4. Ignore the matter because it is not the employee's responsibility

Explanation

Professional ethics require acting with integrity and objectivity, and most organisations provide confidential whistleblowing channels for reporting suspected conflicts of interest or fraud. This allows the concern to be investigated properly and protects the reporter. Ignoring it, public confrontation or immediate media disclosure are not appropriate first steps.

Question 14E1 (Operational level subject)

A firm's data protection officer must ensure customer data is handled lawfully. Which governance arrangement best supports this responsibility?

  1. Deleting all customer records annually without review
  2. Establishing documented data protection policies with clear accountability Correct answer.
  3. Outsourcing all data handling without contractual terms
  4. Relying on individual employees to interpret the law independently

Explanation

Effective data governance requires documented policies, assigned accountability and monitoring so that legal obligations are consistently met. Clear ownership and procedures reduce the risk of breaches and demonstrate compliance. Uncoordinated individual judgement, blanket deletion or unmanaged outsourcing create risk.

Question 15E1 (Operational level subject)

In a responsibility accounting system, which item would be controllable by a production department manager?

  1. The depreciation of the head office building
  2. The company's interest expense on long-term loans
  3. The department's direct material usage variance Correct answer.
  4. The apportioned head office rent

Explanation

Controllable costs are those the manager can influence through their decisions, such as material usage in their own department. Apportioned head office costs, group financing costs and head office asset depreciation are set elsewhere and cannot be influenced locally. Responsibility accounting therefore reports controllable items to each manager.

Question 16E1 (Operational level subject)

A company adopts a policy of paying suppliers promptly and treating them as long-term partners. Which stakeholder perspective does this reflect?

  1. Short-term profit manipulation
  2. Ethical stakeholder management recognising mutual interest Correct answer.
  3. Tax avoidance strategy
  4. Shareholder wealth maximisation only

Explanation

Treating suppliers fairly reflects stakeholder theory, recognising that long-term relationships with suppliers support sustainable performance. It balances the interests of multiple stakeholders rather than focusing solely on shareholders. It is not a tax or profit-manipulation tactic.

Question 17E1 (Operational level subject)

Which document within a corporate governance framework typically sets out the division of responsibilities between the chair and the chief executive?

  1. The statement of financial position
  2. The inventory valuation policy
  3. The sales ledger control account
  4. The board's schedule of matters reserved and role descriptions Correct answer.

Explanation

Good governance requires a clear division of responsibilities, usually documented in role descriptions and a schedule of matters reserved for the board. This prevents concentration of authority and clarifies accountability. Financial statements and ledger accounts are accounting records, not governance documents.

Question 18E1 (Operational level subject)

A retail business is deciding whether to close an underperforming store. Which information is most relevant to the decision?

  1. The historical depreciation charged to date
  2. The future cash flows avoided or lost by closing Correct answer.
  3. The original purchase cost of the store building
  4. The average industry profit margin last year

Explanation

Relevant information for a closure decision concerns future incremental cash flows that differ between the alternatives, including costs avoided and contribution lost. Sunk costs such as original purchase price and past depreciation are irrelevant. Industry averages provide context but do not drive the specific decision.

Question 19E1 (Operational level subject)

Which of the following best explains why an organisation might adopt an enterprise risk management (ERM) framework?

  1. To identify, assess and manage risks in a coordinated portfolio Correct answer.
  2. To eliminate all business risk entirely
  3. To transfer every risk to an insurer
  4. To avoid the need for internal audit

Explanation

ERM provides a structured, organisation-wide approach to identifying, assessing and managing risks as an interconnected portfolio aligned with strategy. It does not eliminate risk, cannot transfer all risk to insurers and complements rather than replaces internal audit. The aim is informed risk-taking within appetite.

Question 20E1 (Operational level subject)

A finance director is a member of the board and also chairs the audit committee. Why does this arrangement conflict with good governance principles?

  1. It compromises the objectivity and independence of the audit committee Correct answer.
  2. It increases the independence of the audit committee
  3. It improves the speed of financial reporting
  4. It reduces the number of board meetings required

Explanation

The audit committee should be independent of executive management to provide objective oversight of financial reporting and audit. A finance director is a senior executive, so chairing the committee creates a conflict and undermines independence. Speed or meeting frequency are not the governance concern.

Question 21E1 (Operational level subject)

An organisation facing rapid technological change wants a control framework that responds to shifting risks. Which approach best reflects a principles-based, adaptable control environment?

  1. Removing performance measurement to increase flexibility
  2. A fixed rulebook that is never updated
  3. Relying solely on annual external audit
  4. A framework of principles supported by regular risk assessment and review Correct answer.

Explanation

Principles-based frameworks such as COSO emphasise a control environment, risk assessment and monitoring that adapt to change. Regular review keeps controls aligned with emerging risks. A static rulebook, reliance on external audit alone or abandoning measurement would weaken control.

Question 22E1 (Operational level subject)

A multinational is criticised for poor labour standards at a supplier's factory. Which concept best justifies the multinational taking responsibility despite not directly employing the workers?

  1. The prudence concept in accounting
  2. Extended corporate social responsibility across the supply chain Correct answer.
  3. Narrow shareholder primacy limited to profit
  4. The matching principle in cost accounting

Explanation

Corporate social responsibility can extend to the supply chain, reflecting the expectation that a business accounts for the social and environmental impacts of its sourcing. Reputational and ethical reasoning support engagement with suppliers over labour standards. Accounting concepts such as prudence and matching address measurement, not social responsibility.

Question 23E1 (Operational level subject)

A company's board wants assurance that its risk management process is working effectively. Which function is best placed to provide independent assurance on this?

  1. The accounts payable clerk
  2. The sales director
  3. The external auditor's tax team
  4. Internal audit reporting to the audit committee Correct answer.

Explanation

Internal audit provides independent, objective assurance on the effectiveness of risk management, control and governance, and reporting to the audit committee preserves its independence. Line managers and clerks are part of the process being reviewed, and a tax team does not provide this assurance.

Question 24E1 (Operational level subject)

A firm is weighing two investment projects. Project A has a higher expected return but also a much wider range of possible outcomes than Project B. Which concept explains the trade-off the board must consider?

  1. The prudence concept only
  2. The going concern assumption
  3. The relationship between risk and return Correct answer.
  4. The time value of money only

Explanation

Investors and boards must weigh expected return against the variability of outcomes, which is the risk-return relationship. A higher expected return that comes with much greater uncertainty requires judgement about risk appetite. Time value, prudence and going concern are accounting concepts that do not capture this trade-off directly.

Question 25E1 (Operational level subject)

A global retailer designs its finance processes so that local teams can adapt reporting to local regulations while group reporting follows a common standard. Which principle does this illustrate?

  1. Centralisation with no local discretion
  2. Complete decentralisation of all controls
  3. Elimination of group-level oversight
  4. Standardisation combined with appropriate local flexibility Correct answer.

Explanation

Effective finance operating models standardise core processes and data for group consistency while allowing necessary local adaptation to regulation and market conditions. This balances control with responsiveness. Total centralisation or decentralisation would lose one of these benefits.

Question 26E1 (Operational level subject)

Under CIMA's definition, management accounting is primarily concerned with which activity?

  1. Recording transactions to meet tax reporting obligations
  2. Providing information to managers for planning, control and decision making Correct answer.
  3. Preparing statutory financial statements for external shareholders
  4. Auditing the annual report for regulatory compliance

Explanation

Management accounting focuses on producing information for internal users, supporting planning, control and decision making. Statutory reporting, audit and tax recording are financial accounting and compliance activities aimed at external parties.

Question 27E1 (Operational level subject)

A company sells a single product. Selling price is $40 per unit, variable cost is $24 per unit and fixed costs are $160,000. What is the break-even point in units?

  1. 6,667 units
  2. 4,000 units
  3. 10,000 units Correct answer.
  4. 2,500 units

Explanation

Contribution per unit is $40 minus $24, equal to $16. Break-even units equal fixed costs divided by contribution per unit, so $160,000 divided by $16 gives 10,000 units.

Question 28E1 (Operational level subject)

Which costing method assigns all manufacturing costs, including fixed production overhead, to units produced?

  1. Activity-based costing
  2. Marginal costing
  3. Standard costing
  4. Absorption costing Correct answer.

Explanation

Absorption costing treats fixed production overhead as a product cost and absorbs it into unit cost. Marginal costing treats fixed overhead as a period cost, while activity-based and standard costing are techniques that can operate within either approach.

Question 29E1 (Operational level subject)

A firm's board delegates day-to-day operations to executive directors while non-executive directors scrutinise performance. Which governance principle does this arrangement primarily reflect?

  1. Maximisation of shareholder wealth
  2. Social responsibility towards employees
  3. Compliance with tax legislation
  4. Segregation of ownership from management Correct answer.

Explanation

Separation of ownership and control creates the need for governance mechanisms such as independent oversight of executives. Non-executive scrutiny helps protect shareholders whose interests may diverge from those of managers.

Question 30E1 (Operational level subject)

In a SWOT analysis, a rival's launch of a cheaper substitute product would be classified as which element?

  1. An opportunity
  2. A strength
  3. A threat Correct answer.
  4. A weakness

Explanation

SWOT separates internal factors (strengths and weaknesses) from external ones (opportunities and threats). A competitor's cheaper substitute is an external adverse factor, so it is a threat.

Question 31E1 (Operational level subject)

Which document typically sets out the rules and procedures by which a company is directed and controlled, including board composition and shareholder rights?

  1. The articles of association Correct answer.
  2. The operating budget
  3. The trial balance
  4. The management letter

Explanation

The articles of association are the constitutional document governing internal management, board powers and shareholder rights. The other items are accounting or management records with no governance authority.

Question 32E1 (Operational level subject)

Which of the following is an example of a 'soft' control in an organisation?

  1. Shared values and ethical culture promoted through leadership example Correct answer.
  2. A mandatory dual authorisation for payments above a threshold
  3. A password-protected access system for the payroll database
  4. Monthly reconciliation of the bank account by a separate clerk

Explanation

Soft controls operate through culture, values and behaviour rather than formal procedures. Dual authorisation, access controls and reconciliation are hard, procedural controls.

Question 33E1 (Operational level subject)

A manager is deciding whether to accept a one-off export order that uses spare capacity. Which cost is relevant to this decision?

  1. Depreciation of existing factory buildings
  2. The original purchase cost of machinery already owned
  3. An allocated share of head office overhead
  4. The variable cost of producing the additional units Correct answer.

Explanation

Relevant costs are future incremental costs that differ between alternatives. The variable cost of extra units is incurred only if the order proceeds, whereas sunk, allocated and existing depreciation costs do not change.

Question 34E1 (Operational level subject)

What is the main purpose of a budget in an organisation?

  1. To replace the need for management judgement
  2. To provide a financial plan that coordinates activities and enables control Correct answer.
  3. To guarantee that actual results equal planned results
  4. To determine the statutory tax liability of the company

Explanation

Budgets translate plans into financial terms, coordinate different functions and provide a benchmark for subsequent control. They do not guarantee outcomes, replace judgement or determine tax liabilities.

Question 35E1 (Operational level subject)

A company's sales volume variance is $12,000 adverse and its selling price variance is $5,000 favourable. What is the total sales variance?

  1. $7,000 favourable
  2. $17,000 adverse
  3. $17,000 favourable
  4. $7,000 adverse Correct answer.

Explanation

Adverse and favourable variances are netted: $12,000 adverse less $5,000 favourable leaves $7,000 adverse. The two components act in opposite directions, so they are offset rather than added.

Question 36E1 (Operational level subject)

Which pricing approach begins with the price customers are willing to pay and then works back to the allowable cost?

  1. Full cost pricing
  2. Cost-plus pricing
  3. Target pricing Correct answer.
  4. Marginal cost pricing

Explanation

Target pricing starts from a competitive market price and deducts the required profit margin to derive a target cost. Cost-plus and full cost approaches build the price upwards from cost instead.

Question 37E1 (Operational level subject)

A company has current assets of $90,000, inventory of $30,000 and current liabilities of $60,000. What is the quick (acid-test) ratio?

  1. 2.00
  2. 1.50
  3. 0.50
  4. 1.00 Correct answer.

Explanation

The quick ratio excludes inventory: ($90,000 minus $30,000) divided by $60,000 equals 1.00. Including inventory would give the current ratio of 1.50, which is a different measure.

Question 38E1 (Operational level subject)

Which of the following best describes the role of internal audit?

  1. To provide independent assurance to the board on the effectiveness of risk management and controls Correct answer.
  2. To design the company's marketing strategy
  3. To express an opinion on the truth and fairness of the financial statements
  4. To prepare the annual budget for operational managers

Explanation

Internal audit gives independent, objective assurance to the board and management on governance, risk and control. The external audit opinion on financial statements is a separate statutory function.

Question 39E1 (Operational level subject)

A company wants to understand which activities add value and which do not across its value chain. Which technique is most suited to this purpose?

  1. Value chain analysis Correct answer.
  2. Break-even analysis
  3. Variance analysis
  4. Sensitivity analysis

Explanation

Value chain analysis examines the sequence of activities from inbound logistics to after-sales service to identify where value is created. The other techniques address cost volume relationships, risk and control rather than value creation.

Question 40E1 (Operational level subject)

Which statement correctly distinguishes financial accounting from management accounting?

  1. Management accounting must follow international reporting standards, while financial accounting is unregulated
  2. Financial accounting is governed by reporting standards, while management accounting has no prescribed format Correct answer.
  3. Both are prepared solely for tax authorities
  4. Financial accounting reports are mainly for internal managers, while management accounting reports are for shareholders

Explanation

Financial accounting is subject to legal and standard-setting requirements and follows prescribed formats. Management accounting is flexible, designed to meet internal information needs without mandatory format.

Question 41E1 (Operational level subject)

A firm uses a just-in-time production system. Which consequence is most consistent with JIT?

  1. Reduced inventory holding costs but greater exposure to supplier failure Correct answer.
  2. Increased warehouse space requirements
  3. Higher levels of buffer inventory to protect against disruption
  4. Longer production lead times

Explanation

JIT seeks to eliminate inventory buffers, lowering holding costs but removing the cushion that protects against supply interruptions. This trade-off between efficiency and vulnerability is central to JIT.

Question 42E1 (Operational level subject)

A manager is evaluated on the profit of a division over which they have authority to set prices and control costs. Which responsibility centre type is this?

  1. Profit centre Correct answer.
  2. Revenue centre
  3. Cost centre
  4. Investment centre

Explanation

A profit centre manager is accountable for both revenues and costs, so performance is judged on profit. An investment centre additionally carries responsibility for the capital employed.

Question 43E1 (Operational level subject)

Which of the following best describes the purpose of a whistleblowing policy in a corporate governance framework?

  1. To guarantee that all reported concerns lead to disciplinary action
  2. To encourage staff to report suspected wrongdoing safely and without fear of reprisal Correct answer.
  3. To replace the need for an audit committee
  4. To prevent employees from contacting external regulators

Explanation

A whistleblowing policy provides protected channels for raising concerns about misconduct, supporting ethical control and early detection of problems. It does not guarantee outcomes, substitute for governance bodies or restrict legitimate external reporting.

Question 44E1 (Operational level subject)

A firm is choosing between buying a component and making it in-house. Which cost should be excluded from the comparison?

  1. The purchase price quoted by the external supplier
  2. The variable materials needed for in-house production
  3. The additional machine hire needed only if production goes ahead
  4. The apportioned factory rent that will be incurred either way Correct answer.

Explanation

Apportioned rent that is unchanged between the alternatives is not a relevant cost and should be excluded. Relevant costs are future incremental amounts that differ between make and buy.

Question 45E1 (Operational level subject)

An organisation's board is reviewing its risk appetite statement. What does risk appetite define?

  1. The maximum loss the organisation has already suffered
  2. The list of all risks identified in the risk register
  3. The insurance policies purchased to transfer risk
  4. The amount and type of risk the organisation is willing to accept in pursuing its objectives Correct answer.

Explanation

Risk appetite expresses the level and nature of risk the board is prepared to take in pursuit of strategy. The risk register records identified risks and insurance is a treatment option, but neither defines appetite.

Question 46E1 (Operational level subject)

A company reports a favourable materials price variance and an adverse materials usage variance. Which explanation is most consistent with both variances?

  1. Buying cheaper, lower-quality material that causes greater wastage Correct answer.
  2. A rise in the standard wage rate for production staff
  3. More efficient use of material than the standard allows
  4. A fall in the market price of a material of unchanged quality

Explanation

Cheaper material lowers the price paid, giving a favourable price variance, but if quality is poorer it produces more waste, giving an adverse usage variance. The two variances are linked through a quality trade-off.

Question 47E1 (Operational level subject)

A divisional manager is paid a bonus based on divisional return on investment (ROI). The manager rejects a project whose return exceeds the company's cost of capital but is below the division's current ROI. Which problem does this illustrate?

  1. A failure of the double-entry bookkeeping system
  2. A favourable selling price variance
  3. Goal congruence failure caused by the performance measure Correct answer.
  4. An unavoidable external threat in the SWOT analysis

Explanation

ROI-based bonuses can motivate managers to reject profitable projects that dilute a high existing ROI, so divisional and corporate goals diverge. This is a goal congruence problem created by the chosen performance measure.

Question 48E1 (Operational level subject)

A company operates in a mature market with strong cost competition. It wants a costing system that traces overhead to products according to the activities that drive those costs. Which approach best fits this need?

  1. Absorption costing using a single labour-hour rate
  2. Activity-based costing Correct answer.
  3. Marginal costing
  4. Process costing

Explanation

Activity-based costing assigns overhead to products via activity cost drivers, improving accuracy where overheads are diverse and competition is cost-driven. A single labour-hour rate can distort product costs when overhead no longer varies with labour.

Question 49E1 (Operational level subject)

A group wants consistent financial reporting across subsidiaries while allowing local managers flexibility in operational decisions. Which control principle best balances these aims?

  1. Removal of all performance measurement for subsidiaries
  2. Elimination of the internal audit function
  3. Centralised standard setting with delegated operational authority Correct answer.
  4. Complete decentralisation of all financial reporting

Explanation

Central standards ensure comparability and control, while delegated operational authority preserves local responsiveness. This balance of centralisation and decentralisation is a recognised design principle for group control.

Question 50E1 (Operational level subject)

A manufacturer's fixed costs are $200,000, contribution per unit is $25 and budgeted output is 10,000 units. What is the margin of safety as a percentage of budgeted sales volume?

  1. 20% Correct answer.
  2. 80%
  3. 50%
  4. 25%

Explanation

Break-even units are $200,000 divided by $25, equal to 8,000 units. Margin of safety is 10,000 minus 8,000, equal to 2,000 units, which is 20% of budgeted volume.