Question

The margin of safety may be defined as:

• A. The difference between planned sales and break even point sales.
• B. The extent to which sales revenue exceeds fixed costs.
• C. The excess of planned sales over the current actual sales.
• D. The point at which break-even point sales are achieved.

Answer 1

Answer: (A)

The difference between planned sales and break even point sales.

Margin of Safety is defined as the extra sales over and above the break even sales. This signifies the safer zone for the organization ensuring that there will be no loss to the organization.

Example: Selling Price Rs.10 P/U, No. of units sold 1000. Variable Cost Rs.4 P/U, Fixed Cost Rs.3000

Selling Price Rs. 10

Less: Variable Cost Rs. 4

Contribution Per Unit Rs.6

BEP= Fixed Cost/Contribution

= Rs. 3000/Rs.6

= 500 units i.e Rs.5000

Margin of Safety= Actual Sales - Break Even Sales

=Rs.10000-Rs.5000

=Rs.5000 or 500 units