Reading comprehension is a skill that empowers lifelong learning intelligence for a better self.
The margin of safety..
✅ ..(MOS in short), is a measure of how much a company’s sales level can fall before it becomes unprofitable.
✅ ..using the following formula:
🚩 Margin of Safety (in quantity) = Current Sales Quantity — Breakeven Sales Quantity
✅ Current Sales Quantity:
🚩 The number of units actually sold by the company during a particular period.
✅ Breakeven Sales Quantity:
🚩 The quantity of units the company needs to sell in order to cover its fixed costs and variable costs and achieve the breakeven point.
✅ The breakeven point is the sales level at which a company earns no profit no loss.
✅ It can be calculated using the following formula:
🚩 Breakeven Sales Quantity = Total Fixed Costs ➗ (Sales Price per unit — Variable Cost per unit)
✅ Total Fixed Costs:
🚩 The sum of all costs that do not vary with the level of production, such as rent, salaries, and insurance.
✅ Sales Price per unit:
🚩 The selling price of each unit of the product.
✅ Variable Cost per unit:
🚩 The cost of producing each unit, including direct materials, direct labour, and variable overhead.
✅ By subtracting the breakeven sales quantity from the current actual sales quantity, we can determine the margin of safety in quantity, which indicates the cushion that a company has against a drop in sales revenue.