can anyone tell me what is the concept/reason behind the formulae :
Margin of safety=Profit/ pv ratio
gurjot singh (article) (35 Points)
22 January 2010can anyone tell me what is the concept/reason behind the formulae :
Margin of safety=Profit/ pv ratio
P/v ratio is contribution in terms of %age on sales.
Contribution on MOS is nothing but profit.
so when we calculate P/V on MOS we will get contribution on MOS i.e profit.
the original formula is Profit = MOS*P/V ratio
From that we can change this formula in different manner.
Request to other members eplore it if possible
CourseCart.in
(Mentor at SHAYVIDZ Academy)
(3756 Points)
Replied 22 January 2010
Total Sales have to parts :
1. BEP Sales (e.g. 60%)
2. Margin of Safety Sales (e.g. 100-60=40%)
From BEP Sales, there will b NO PROFIT...
PROFIT will be from MOS SALES....
P/V RATIO represents the profit earning capacity..
So we can formulaise it as below :
PROFIT = MOS Sales * P/V Ratio
or
MOS Sales = PROFIT divided by P/V Ratio
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