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Accounting For Managers - Management Accounting-Marginal Costing

Margin of Safety-Marginal Costing

   Posted On :  02.05.2018 11:04 pm

Margin of Safety

Margin of Safety
 
 
Total sales minus the sales at break-even point is known as the margin of safety. Lower break-even point means a higher margin of safety. Margin of safety can also be expressed as a percentage of total sales. The formula is:
Margin Of Safety =      Total Sales – Sales At B.E.P.
 
 
Higher margin of safety shows that the business is sound and when sales substantially come down, (but not below break even sales) profit might be earned by the business. Lower margin of safety, as pointed out earlier, means that when sales come down slightly profit position might be affected adversely. Thus, margin of safety can be used to test the soundness of a business. In order to improve the margin of safety a business can increase selling prices (without affecting demand, of course) reducing fixed or variable costs and replacing unprofitable products with profitable one.
 
 
 
Illustration 1: beta manufacturers ltd. Has supplied you the following information in respect of one of its products:

Total Fixed Costs

18,000

Total Variable Costs

30,000

Total Sales

60,000

Units Sold

20,000

 
 
Find out (a) contribution per unit, (b) break-even point, (c) margin of safety, (d) profit, and (e) volume of sales to earn a profit of rs.24,000.
Illustration 2: Calculate `Margin Of Safety’ from the following data:


Illustration 3:

 

 From the following particulars, find out the selling price per unit if b.E.P. Is to be brought down to 9,000 units.

Variable Cost Per Unit Rs.75

 

Fixed Expenses

Rs.2,70,000

Selling Price Per Unit

Rs.100

 

Solution:
 
 
Let us assume that the contribution per unit at B.E.P. Sales of 9,000 is X.

 
                     Fixed Cost
B.E.P.  = ------------------------------
                    Contribution Per Unit
 
Contribution per unit is not known. Therefore, 
                         2,70,000
9,000 Units = -------------
                              X
 
9,000 X = 2,70,000
 
X = 30
 
Contribution Is Rs.30 Per Unit, In Place Of Rs.25. So, The Selling Price Should Be Rs.105, I.E. Rs.75 + Rs.30.

 

 

 

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