Managerial Accounting

Margin of Safety 4

Margin of Safety

Introduction

The margin of safety is a financial ratio that measures mount of sales exceeding the break-even point. It can also be expressed as the revenue earned after the organization has paid all the variable and fixed costs that is associated with producing goods and services (Weygandt, et al, 2015). The paper thus discusses the aspects of margin of safety.

Discussion

Different formulas can be used for calculating the margin of safety (Weygandt, et al, 2015). The following formula can be used for calculating the margin of safety:

Margin of Safety = Actual sales — BreakEven point

Margin of safety % = Managerial Accounting x 100

The following example can be used to calculate margin of safety.

The current sales at a company is $ 100,000, the breakEven point is $ 75,000.

Under the circumstance,

Margin of safety % = Managerial Accounting  1 x 100

= Managerial Accounting  2 x 100

In order to obtain a margin of safety of 70% and above,

0.7 = Managerial Accounting  3

0.7A = A-75,000

-0.3A = -75,000

A= 250,000

In such a situation, the company has to ensure that it has made sales above $ 250,000

In order to reduce the margin of safety from 70 to 50%

0.5=Managerial Accounting  4

0.5A =A-75,000

-0.5A = -75,000

A= 150,000

The company will therefore be required to reduce its sales from $ 250,000 to $ 150,000

If the company intends to the margin of safety from 50%- 70%, then it will have to increase the sales from $ 150,000 to $ 250,000.

Conclusion

In conclusion, it is evident that an organization may be required to adjust its sales or number of products sold to obtain the required margin of safety.

Reference

Weygandt, J.et al. (2015). Financial & Managerial Accounting. John Wiley & Sons.