【A.06.01】How many sales (in quantity) are affordable to drop before starting to make losses?

Briefing Note
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The margin of safety..

✅ ..(MOS in short), is a measure of how much a company’s sales level can fall before it becomes unprofitable.


The margin of safety can be calculated..

✅ ..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.


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