--%>

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 way of Price Elasticity of

    Explain the way of Price Elasticity of Demand.

  • Q : Illustrates the term shot run

    Illustrates the term shot run production function?

  • Q : Explain the role of demand factor in

    Explain the role of demand factor in pricing briefly.

  • Q : Different types of determinants of

    What are the different types of determinants of advertisement elasticity?

  • Q : Depletion of fossil fuel Resources I

    I have a problem in economics on Resources. Please help me in the following question. The depletion of the fossil fuel reserves will cause the world’s production possibilities frontier to shift: (i) Outward and decrease capacity

  • Q : Illustration of specific training The

    The knowledge gained while an Apple employee learns a specialized technique on an iPod assembly line is an illustration of: (w) comparative technological advantage. (x) specific training. (y) on-the-job leveraging. (z) general training.

    Q : Supply of labor in a perfectly

    The supply of labor within a perfectly competitive market is: (w) an upward sloping curve. (x) a horizontal line. (y) above the MRC. (z) below the MRC. Hello guys I want your advice. Please recommend some views for

  • Q : Aggregate Supply of Labor Labor

    Labor supplies for the economy as an entire are LEAST determined through: (w) labor unions. (x) wage rates and structures of wages. (y) education and training of the work force. (z) labor force participation rates. Hey friends plea

  • Q : Requirement of equal paying amounts A

    A requirement of equal pay for workers along with equal amounts of education, responsibility, and experience is termed as the doctrine of: (1) marginal productivity. (2) non-exploitation. (3) central wage planning. (4) comparable wort

  • Q : Illustrates the Objectives of

    Illustrates the Objectives of managerial economics?