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What is Margin of Safety and its Significance

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 Rakesh Sahu asked about 3 years ago

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 CA Sandeep Bohra answered almost 3 years ago

The margin of safety is the reduction in sales that can occur before the breakeven point of a business is reached. This informs management of the risk of loss to which a business is subjected by changes in sales. The concept is useful when a significant proportion of sales are at risk of decline or elimination, as may be the case when a sales contract is coming to an end. A minimal margin of safety might trigger action to reduce expenses. The opposite situation may also arise, where the margin of safety is so large that a business is well-protected from sales variations. **Significance** The concept is useful when a significant proportion of sales are at risk of decline or elimination, as may be the case when a sales contract is coming to an end. A minimal margin of safety might trigger action to reduce expenses. The opposite situation may also arise, where the margin of safety is so large that a business is well-protected from sales variations.

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Data?1494421730 rohit awasthi answered about 3 years ago

Dear Friend > Margin of Safety Margin of Safety (MOS) represents the difference between ‘the actual total sales and sales at break-even point.’ It can be expressed as a percentage of total sales, or in value, or in terms of quantity. Significance 1. Upto Break even point the contribution earned is sufficient only to recover fixed costs. However beyond the Break even point. The contribution is called profit (since fixed costs are fully recovered by then) 2. Profit is nothing but contribution carried out of Margin of Safety Sales. 3. The size of the margin of safety shows the strength of the business. 4. If the margin of safety is small, it may indicate that the firm has large fixed expenses and is more vulnerable to changes in sales. 5. If the margin of safety is large, a slight fall in sales may not affect the business very much but if it is small even a slight fall in sales may adversely affect the business. Thanks

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