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Suppose a business with a break-even point of 960000 in sales actually makes 1200000 in sales. The margin of safety, which is 240,000 dollars and 20% of sales, is expressed in dollars.
What does "margin of safety" mean?
According to the investment idea known as the "margin of safety," a stock should only be bought when its market price is much lower than its underlying worth. In other terms, the margin of safety is the gap between the market price and your estimate of a security's inherent value.
The sales decline that can occur before the business reaches the break-even point (BEP) and loses money is known as the margin of safety. This computation also provides the number of sales a company has generated above its BEP. This is how the margin of safety is determined: Actual sales minus break-even sales is margin of safety.
In the given question:
Current sales - Break even point= margin of safety
1,200,000 - 960,000 = 240,000 margin of safety in dollars
[tex]\frac{current sales - break even point}{current sales}[/tex] X 100= margin of safety
[tex]\frac{1,200,000 - 960,000}{1,200,000}[/tex] X 100= margin of safety
margin of safety = [tex]\frac{240,000}{1,200,000}[/tex] = 0.2= 20%
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