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Margin of Safety: A margin of safety is the comfort zone between the budgeted sales and the break even sales where a company is safe from any losses.
The margin of safety in dollars and percentage
Answer to Problem 11F15
Solution:
1-a) The margin of safety in dollars is $ 5,000
1-b) The margin of safety in percentage is 25%
Explanation of Solution
A margin of safety is calculated by deducting the break-even sales in dollars from the budgeted sales in dollars of the company. The budgeted sale is an estimation of sales in dollars during a particular period which $20,000 as per exercise and the break-even sales in dollars is ascertained by dividing the fixed cost by contribution margin ratio $15,000. A contribution margin ratio is contribution margin expressed in percentage.
. Computation of Margin of Safety in dollars
Computation of Margin of Safety in percentage
Given:
| Sales (1,000 units ) | $20,000 |
| Variable expenses | $12,000 |
| Contribution margin | $8,000 |
| Fixed expenses | $6,000 |
| Net operating income | $2,000 |
Hence it is concluded that the Oslo Company has Margin of Safety of $5,000 or 25% of sales revenue. It means that within the range of $5,000 the company is safe from incurring any loss from the sale of product. It provides the company a comfort of safety or time to take precautions to avoid any loss.
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