Margin Of Safety Explanation

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Margin of safety (MOS) is the excess of budgeted or actual sales over the break even volume of sales. It states the amount by which sales can drop before losses begin to be incurred. The higher the margin of safety, the lower the risk of not breaking even. The formula or equation for the calculation of margin of safety is as follows: [Margin of Safety = Total budgeted or actual sales − Break even sales] The margin of safety can also be expressed in percentage form. This percentage is obtained by dividing the margin of safety in dollar terms by total sales. Following equation is used for this purpose. [Margin of Safety = Margin of safety in dollars / Total budgeted or actual sales] Example: Sales(400 units @ $250) | $100,000 | Break even sales | $87,500 | Calculate margin of safety | Calculation: | Sales(400units @$250) | $100,000 | Break even sales | $ 87,500 | | --------- | Margin of safety in dollars | $ 12,500 | | ======= | Margin of safety as a percentage of sales:12,500 / 100,000= 12.5% | It means that at the current level of sales and with the company's current prices and cost structure, a reduction in sales of $12,500, or 12.5%, would result in just breaking even. In a single product firm, the margin of safety can also be expressed in terms of the number of units sold by dividing the margin of safety in dollars by the selling price per unit. In this case, the margin of safety is 50 units ($12,500 ÷ $ 250 units = 50 units). Review Problem: Voltar company manufactures and sells a telephone answering machine. The company's contribution margin income statement for the most recent year is given below: Description | Total | Per unit | Percent of Sales | Sales (20,000 units) | $ 1,200,000 | $60 | 100% | Less variable expenses | 900,000 | $45 | ?% | | --------- | -------- | -------- | Contribution margin | 300,000 |
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