Margin of Safety is calculated by using
\(\frac{\text{Profit}}{\text{P / V Ratio}}\)
Margin of safety is the excess of actual (or budgeted) sales over break-even sales: \( \text{MOS} = \text{Actual Sales} - \text{BEP Sales} \).
Sales beyond break-even earn contribution at the P/V ratio, and that contribution is all profit because fixed costs are already covered. So \( \text{Profit} = \text{MOS} \times \text{P/V Ratio} \), which gives \( \text{MOS} = \frac{\text{Profit}}{\text{P/V Ratio}} \).
For example, with sales of ₹1,00,000, a P/V ratio of 40% and fixed cost of ₹24,000, profit is ₹16,000, so \( \text{MOS} = \frac{16{,}000}{0.40} = 40{,}000 \), which equals sales of ₹1,00,000 less break-even sales of ₹60,000.
The other expressions measure different things. Fixed cost divided by contribution gives break-even sales as a fraction of actual sales, so it equals break-even sales divided by sales. Profit divided by sales is the net profit ratio.
Hence, \(\frac{\text{Profit}}{\text{P / V Ratio}}\).
Similar Questions
Profit volume ratio of an enterprise is 40%. To offset 10% decrease in selling price, how much sales must be increased ?
Marginal-costing technique is useful for
Important Questions from Marginal Costing
- Which one of the following is not correct ?
From the following information, find out the number of units that must be sold by the firm to earn profit of ₹ 80,000 per year.
Sales price : ₹ 25 per unit
Variable manufacturing costs – ₹ 12 per unit
Variable selling costs – ₹ 3 per unit
Fixed factory overheads – ₹ 5,00,000
Fixed selling costs – ₹ 3,00,000
The Break Even point expressed in amount of sales in rupees of X Ltd having selling Price of ₹ 20 per unit, variable cost of ₹ 14 per unit and fixed cost of ₹ 7,92,000 is:
Profit volume ratio of an enterprise is 40%. To offset 10% decrease in selling price, how much sales must be increased ?
Marginal-costing technique is useful for
