Margin of safety

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Querist : Anonymous

Querist : Anonymous (Querist)

08 February 2012 The selling price of a product is ` 9 per unit with variable cost of ` 6 each and the fixed costs are ` 54000 per month. In a period when actual sales are ` 180000, the margin of safety in units is -

CMA. CS. Sanjay Gupta

CMA. CS. Sanjay Gupta (Expert)

08 February 2012 MOS = Total Sales - Break even sales

Here,
Sale Price Per Unit = Rs.9
Total Units Sold= (Rs 180000/9)= 20000 units.
Variable Cost = Rs 6 per unit.

Contribution per unit= (9-6)=Rs 3 per unit.

Break even sales is sales where contribution is just enough to meet the fixed cost.

Fixed Cost here is Rs 54000/-
So, No of Units to be sold to Break Even= (Rs 54000/3)=18000 units.

So, Margin of safety=(20000-18000) = 2000 units.

It means company will start earning profit when its sales go beyond 18000 units.

Jatin Agrawal

Jatin Agrawal (Expert)

08 February 2012 d contribution is 9-6=3. so BRP in units is 54000\3=18000 units, whereas actual units sold is 20000 units(180000/9)

since we have sold 2000 more units then the amt. required to breakeven, these excess units sold i.e. 2000 units is Margin of safet(in units).

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