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What is the formula for calculating the margin of safety?

Practice Questions

Q1
What is the formula for calculating the margin of safety?
  1. Actual Sales - Break-even Sales
  2. Break-even Sales - Actual Sales
  3. Total Sales - Variable Costs
  4. Fixed Costs / Contribution Margin

Questions & Step-by-Step Solutions

What is the formula for calculating the margin of safety?
  • Step 1: Understand that the margin of safety shows how much sales can drop before a business reaches its break-even point.
  • Step 2: Identify the actual sales amount. This is the total sales the business is currently making.
  • Step 3: Identify the break-even sales amount. This is the sales level at which the business covers all its costs and makes no profit or loss.
  • Step 4: Use the formula: Margin of Safety = Actual Sales - Break-even Sales.
  • Step 5: Subtract the break-even sales from the actual sales to find the margin of safety.
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