GuideFoot - Learn Together, Grow Smarter. Logo

In Business / High School | 2025-07-03

From the following particulars, calculate the Margin of Safety:
Fixed cost Rs. 1,00,000
Variable cost Rs. 1,50,000
Total Sales Rs. 3,00,000

Asked by Yapah87651

Answer (2)

To calculate the Margin of Safety, we first need to understand that it represents the difference between actual sales and break-even sales. It shows the amount by which sales can drop before a business reaches its break-even point, where total costs equal total sales.
The Margin of Safety can be calculated using the following formula:
Margin of Safety = Actual Sales − Break-even Sales
Step-by-step Calculation:

Calculate Break-even Sales:
The break-even point in sales (in Rs) is calculated using the formula:
Break-even Sales = Contribution Margin Ratio Fixed Costs ​
Where the Contribution Margin Ratio (CMR) is:
CMR = Sales Sales − Variable Costs ​
From the given information:

Fixed Costs = Rs. 1,00,000
Variable Costs = Rs. 1,50,000
Total Sales = Rs. 3,00,000

Calculate CMR:
CMR = 3 , 00 , 000 3 , 00 , 000 − 1 , 50 , 000 ​ = 3 , 00 , 000 1 , 50 , 000 ​ = 0.5
Now, calculate the Break-even Sales:
Break-even Sales = 0.5 1 , 00 , 000 ​ = 2 , 00 , 000 Rs

Calculate Margin of Safety:
Margin of Safety = 3 , 00 , 000 − 2 , 00 , 000 = 1 , 00 , 000 Rs


So, the Margin of Safety is Rs. 1,00,000. This means the business can afford a drop in sales of up to Rs. 1,00,000 before it will start incurring a loss.

Answered by RyanHarmon181 | 2025-07-06

The Margin of Safety is calculated as the difference between actual sales and break-even sales. In this case, it is Rs. 1,00,000, indicating how much sales can drop before incurring a loss. This metric is crucial for understanding the financial health of a business.
;

Answered by RyanHarmon181 | 2025-07-11

Related Questions in Business

📝 Answered - When the yield to maturity of a bond goes up, the price typically: A. is determined by market factors B. goes down C. does not change D. goes up

📝 Answered - A type of life insurance policy that requires premiums only for a specified number of years or to a specific age is called a: A. term life policy B. limited pay policy C. key man insurance policy D. split dollar policy

📝 Answered - Which of the following correctly explains how the concept of demand affects the change in use of credit? Select the two correct answers. A. High interest rates yield low demand for credit. B. Low interest rates yield high demand for credit. C. High interest rates yield high demand for credit. D. Low interest rates yield low demand for credit. E. Both low and high interest rates yield low demand for credit because consumers see it as an indicator that the market is not in equilibrium. Demand is highest when rates are neither too high nor too low.

📝 Answered - A company is researching mining at four different land areas using different types of equipment. The table below shows the costs of land, equipment, mining, and reclamation for the four locations: | Locations | Cost of land | Cost of equipment | Cost of mining and reclamation | Time taken to mine the area | | --------- | ------------ | ----------------- | -------------------------------- | --------------------------- | | 1 | $100,000 | $10,000 | $5,000 per day | 30 days | | 2 | $35,000 | $6,000 | $4,500 per day | 45 days | | 3 | $30,000 | $7,500 | $3,500 per day | 120 days | | 4 | $40,500 | $8,000 | $7,000 per day | 65 days | Considering all costs, which location will cost the least for the company to mine? A. Location 1 B. Location 2 C. Location 3 D. Location 4

📝 Answered - Internal-operational communications are messages that A. are circulated both inside and outside a business B. get an organization's work done C. are sent between competing organizations within the same industry D. employees send to discuss strictly personal matters