Question

Margin of safety is

• A. BEP sales less actual sales
• B. Sales less contribution
• C. Actual sales less BEP sales
• D. None of these

Hint:

Think of the Margin of Safety as your "safety zone." The break-even point is the danger point where profit is zero. The margin of safety is how far your current sales are from that danger point. A higher MOS indicates a lower risk of making a loss. Another important formula for MOS is: \( \text{MOS} = \frac{\text{Profit}}{\text{P/V Ratio}} \).

Answer 1

The Correct Option is C

Step 1: Understanding the Question:
The question asks for the correct formula to calculate the Margin of Safety.
Step 2: Key Concept:
The Margin of Safety (MOS) is a key concept in break-even analysis. It represents the cushion or the amount by which actual or budgeted sales can fall before the company starts incurring losses. It is the excess of actual sales over the break-even sales.
Step 3: Detailed Explanation:
The formula for Margin of Safety is:
\[ \text{Margin of Safety (MOS)} = \text{Actual Sales} - \text{Break-Even Point (BEP) Sales} \]
Let's analyze the options:
- (A) BEP sales less actual sales: This is the negative of the MOS and would indicate a loss. Incorrect.
- (B) Sales less contribution: This is incorrect. Sales less Variable Cost equals Contribution.
- (C) Actual sales less BEP sales: This is the correct definition and formula for the Margin of Safety.
Step 4: Final Answer
The Margin of Safety is calculated as the difference between the actual sales and the break-even sales.