--%>

Introduction of the term Margin of Safety

Provide a brief introduction of the term Margin of Safety?

E

Expert

Verified

Margin of Safety is the quantity of sales that makes profit. In other terms, sales beyond Break Even Point are named as Margin of Safety. It is evaluated as the differentiation between total sales and the break even sales. It can be stated in monetary terms or number of units. It can be stated as below:

Margin of Safety = Sales – Break Even Sales

= Sales - {(Fixed Cost) / (P/V Ratio)}

= ((Sales * (P/V) Ratio) - Fixed Cost) / (P/V) Ratio

= (Contribution - Fixed Cost) / (P/V) Ratio

= Profit / (P/V) Ratio

The size of margin of safety is a very significant guide to the financial power of a business. If margin of safety is huge, that indicates that BEP is much below the real sales, that means business is in a sound condition and decrease in sales will not influence the profit of the business. On the other hand, when margin of safety is low down any loss of sales might be a serious issue. Therefore, efforts require to be made to diminish fixed costs, variable costs or rising the selling price or sales volume to improve contribution and entire P/V Ratio.

   Related Questions in Managerial Economics

  • Q : Explain the decision making areas of

    Explain the decision making areas of the decision making.

  • Q : Illustrates the Importance of

    Illustrates the Importance of managerial economics?

  • Q : Purely competitive equilibrium labor

    When this purely competitive labor market is firstly in equilibrium at D0L, S0L, an increase within the price of output will result into equilibrium being attained at: (w) D0L, S0L. (x) D1L, S1L. (y) D2L, S1L. (z) D1L, S0L.

    Q : Merits and demerits of Scarcity

    What are the merits and demerits of Scarcity Definition of economics?

  • Q : Illustrates the fixed and variable

    Illustrates the fixed and variable inputs in economics?

  • Q : Maximizes profit by hiring labor A firm

    A firm maximizes profit through hiring labor at the point where labor’s: (1) marginal physical product equals its average physical product. (2) marginal revenue product equals its marginal resource cost. (3) rate of exploitation is greatest. (4)

  • Q : Accumulation of certificates of

    A potential employee’s accumulation of certificates and degrees to stimulate interest through a potential employer is termed by economists as: (1) specific training. (2) signaling. (3) general training. (4) screening. (5) ticket-punching. <

  • Q : Elasticity of the supply possible

    When Chandra and Morgan are identically skilled and every can decide the number of hours she works as: (w) the elasticity of Morgan’s labor supply exceeds the elasticity of supply for Chandra’s labor at each possible quantity of labor. (x) Morgan’s i

  • Q : Explain the concept of revenue Explain

    Explain the concept of revenue.

  • Q : Value of the Marginal Product and

    When a firm is a price taker in the sale of its product, in that case labor’s: (w) ARP (Average Revenue Product) = MRP. (x) ARP = VMP. (y) VMP > MRP. (z) VMP = MRP. Can someone explain/help me with best so