--%>

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 : Supply of labor by increase in wages

    If the wage rate increases from $25 per hour to $40 per hour, in that case the elasticity of the supply of labor from this worker is roughly: (i) zero. (ii) 7/15. (iii) 13/15. (iv) one. (v) minus 13/15.

    Q : Credentialism and Occupational Licensing

    Occupational licensing often requires qualifications with small relevance for performance in a specific position before an individual can legally be hired. Artificial and inefficient barriers to the practice of specific occupations, such as dog groome

  • Q : Determine the demand of auto-market

    Suppose that the auto market began at the intersection of S0 and D0 before people began to expect auto prices to rise in the close to future. How will it influence the auto market?: (1) No change. (2) Demand shifts to D2. (3) Demand sh

  • Q : Explain about the signaling Signaling :

    Signaling: (w) attempts to finesse adverse selection. (x) involves behavior by agents to communicate special qualifications which will elicit the offer of a contract from a principal. (y) refers to potential employees obtaining skills, education or ex

  • Q : Offsets the amount of revenue to added

    Profit maximizing firms will adjust their employment of labor till the last employee hired adds: (w) more to the firm’s revenue than this adds to cost. (x) more to the firm’s cost than this adds to the firm’s revenue. (y) an amount o

  • Q : Investment in human capital in market

    Most economists would categorize the bulk of the funds spent upon your college education like: (1) an investment in human capital. (2) financial capitalization. (3) consumption. (4) specific training. (5) personal saving. Please gu

  • Q : Illustrates fundamental characters of

    Illustrates the fundamental characters of human existence given by Lionel Robbins?

  • Q : Competitive Profit Maximization in

    A profit-maximizing competitive firm hiring by a competitive labor market will be within equilibrium where is: (w) MPP = MRC. (x) w = MRC. (y) VMP = MPP. (z) VMP = w. Hey friends please give your o

  • Q : Explain important specific functions of

    Explain the important specific functions of material economics?

  • Q : Substituting machinery for human labor

    Substituting sophisticated machinery for human labor is termed as: (1) automation. (2) industrial sabotage. (3) kinetic engineering. (4) outsourcing. (5) robotics. Hello guys I want your advice. Please recommend some views for abov