--%>

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 : Unexpected increases in national income

    A firm is probably to reduce the number of workers this employs when there are: (i) reductions in the wage rate. (ii) increases in the price of the output. (iii) accumulations of specific training from workers. (iv) technological advances which encourage automation. (

  • Q : Illustrates the economies of scale are

    Illustrates the economies of scale are categorization?

  • Q : Competitive demand of employer A

    A competitive demand of employer for labor is: (1) derived from the demand that exists for the firm’s output. (2) inverted compared to regular demands. (3) shifted rightward by hikes in real wage rates. (4) positively sloped. (4) determined thro

  • Q : Labor demand increases and supply

    Wages tend to increase while labor demand: (w) and supply both decrease. (x) decreases and supply increases. (y) and supply both raise. (z) increases and supply decreases. Please choose the right answer from above.

  • Q : Substitution and Demands for Resources

    When the relative price of a resource decreases, we would usually expect a firm to employ less units of: (w) that resource due to the substitution effect. (x) that resource because of the output effect. (y) complementary resources due to the substitut

  • Q : What are the reasons for adopting

    What are the reasons for adopting penetration price strategy?

  • Q : Define consumer psychology and pricing

    Define the consumer psychology and pricing and affecting elements.

  • Q : Define the term business forecasting

    Define the term business forecasting briefly.

  • Q : Illustrates the characteristics of

    Illustrates the characteristics of Oligopoly?

  • Q : Signaling and Screening Problem Assume

    Assume that you view a degree as a ticket to a high-paying job along with prospects of quick promotion, and that accumulating human capital by learning and studying valuable material is largely not relevant. Your perception is which a college degree f